Facebook Stock Has a New, Looming Problem
If you didn’t know any better, you would call Facebook (NASDAQ:FB) stock a bargain. As of this morning, Facebook stock was trading for about $164 per share. That means investors are paying a little over 25 times earnings for a company that’s growing 40% per year and bringing about 40% of its revenue to the bottom line every quarter.
A market-average price-earnings multiple for a high-quality growth stock? Sign me up.
But wait just a minute. Facebook stock is not what it was. The company’s namesake app is all grown up. The social media website is still controversial, but it’s less appealing to teenagers than adults.
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Politics, once seen as a profit center, is now just a source of frustration and cost. Politicians around the world are making a big show of attacking the website, cancelling their accounts and calling for a break-up of the company.
What Role Will FB Fill?
Given the degree of controversy, it’s clear that Facebook isn’t achieving its goals.
FB wants to purely be a communication service, facilitating the exchange of messages rather than the changing of minds. If it is going to change minds, it wants to do so with scripted, TV-like shows, some of which are starting to draw audiences and good reviews.
But however strongly it moves in that direction, its past continues to haunt it. Facebook wants to cut off “white supremacy” but not the “white nationalists” pushing it. It wants to host targeted advertising but finds many targets controversial.
Facebook’s most basic function – connecting people – can easily be abused by multi-level marketers. Facebook is preventing advertisers from accessing third-party data to protect itself from criticism by politicians, but that creates problems for advertisers who depended upon the data. Meanwhile, FB stock keeps getting criticized by the media for collecting data from its users.
Facebook is being called an experiment that failed, and its namesake app is becoming less important. Messenger and WhatsApp are going to be more important marketing channels for FB stock.
FB, in short, no longer wants to help people get together. It wants to help markets come together. Mostly it wants to get out of the news.
The Real Crisis for Facebook Stock
Facebook now has nine data centers and has announced a tenth. The locations of the data centers indicate that FB is dependent on U.S. and European traffic. Those areas just happen to be the places where the calls for regulating the service are the strongest.
The extent to which a data center is used is less important than the amount of money spent on its construction and maintenance. Facebook is expected to spend $14 billion on its data centers this year, almost one-quarter of its total revenue. Meanwhile, Facebook stock tanked after FB reported its second-quarter results because its revenue growth slowed.
More important, user growth stopped in North America and was negative in Europe. The company’s data centers are all located on those two continents. Its capital budget may no longer be aligned with its growth, with more than two-thirds of its daily active users now in Asia, Africa, or Latin America.
The Bottom Line on Facebook Stock
FB is expected to earn $1.48 per share during the third quarter, or about $3.5 billion, on revenue of $14.29 billion. That compares with net income of $5.1 billion, or $1.74 per share, on revenue of $13.2 billion in the June quarter, which was called a disaster.
That means analysts are expecting the company’s profits to fall while its revenue continues to rise. If Facebook’s top line doesn’t increase, investors are going to start noticing the misalignment of its assets.
The problems of Facebook stock may have just begun.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
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