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Facebook's New Operating System: Forget FTC Fears and Hold On to This Stock

Global social networking giant, Facebook Inc (NASDAQ:FB) has recently been in the news for starting to build its own operating system to reduce its dependence on Alphabet's (NASDAQ:GOOGL) (NASDAQ:GOOG) Android OS.

The company has gone through its fair share of tribulations during the year 2019, most notably its problems with the Federal Trade Commission (FTC), and has still managed to come out a winner for investors. The revenues and profitability have grown and the stock price has continued to show consistent appreciation. In my opinion, the stock looks to be an overall interesting investment.

A solid revenue model

In its most recent quarterly results for the period ended 30th September, 2019, Facebook reported a top-line of $17.65 billion, which was not only a huge jump from the $13.73 billion in the corresponding quarter of 2018 but also higher than the analyst consensus estimate of $17.37 billion. It is important to take a step back and analyze where all this money comes from. Facebook drives more than 90% of its revenues from digital advertising, which it can do because it has the data of all its users' likes and preferences. This data grows with every passing day, and advertisers pay Facebook to target their specific audiences with a level of precision that is second only to Google.

Users are happy to hand over this data to Facebook compared to other sites, and in exchange Facebook puts the most relevant advertising content on their pages. Other sites with high user traffic struggle to provide this kind of offering and require a very heavy amount of data sorting and management to offer even the slightest level of targeted marketing.

Apart from this model, the company is also looking to monetize its Marketplace, which already has over 800 million active users. Its revenue streams are so robust that despite having a high stock-based compensation structure across the organization, Facebook still manages a net margin as high as 27.08% and a return-on-equity of around 20.77%.

FTC Fears

Facebook has always been on the radar of the Federal Trade Commission. The company recently had to shell out a $5 billion fine in a settlement with the FTC after many years of the regulator's investigation into the company's operations after Facebook allegedly failed to protect user data from third parties, serving ads through the use of phone numbers provided for security and misrepresenting the fact that its facial recognition software was turned on by default.

While such stories tend to scare investors, it is important to accept that Facebook does operate in some gray areas and might always face more lawsuits and regulatory issues compared to other tech companies. However, this is a part and parcel of the company's life as it has thrived despite a number of such issues in the past.

While legal troubles do tend to make investors jittery, Facebook's long-term investors seem to have clearly stood by the company, which is why the stock price has appreciated by as much as 65% over the past year. Gurus have invested through the noise as we saw Mario Gabelli (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Tom Gayner (Trades, Portfolio) add the stock in the previous quarter.

Hedge funds and financial wizards also continue to be bullish on Facebook. Some of the prominent names on this list include Michael Sidhom (Immersion Capital), David Fear (Thunderbird Partners), Leon Tepper (TeppersList), Bo Shan (Gobi Capital) and Hamilton Helmer (Strategy Capital).

Facebook Has A Promising Year Ahead

When one looks beyond the FTC battle, Facebook seems to have a promising 2020 ahead. Corporate spending on digital marketing is continuously going up to generate business. The ease of its advertising interface with respect to targeting makes the Facebook platform a virtual necessity in every ad campaign. Also, the U.S. presidential elections of 2020 are expected to be a major driving force for Facebook's revenues, as both major parties are expected to do a heavy amount of Facebook marketing during their campaigning.

Key takeaways

Facebook is the 5th ranked site in the world in terms of global internet engagement as per its Alexa rankings, and the company's monthly active users are rapidly increasing. Out of a world population of around 7.8 billion, about 2.5 billion people are using one product or the another from the Facebook family.

The company has been able to stay strong and make strategic acquisitions to ensure that it stays in a dominant position. The company's capital structure is also robust and it is practically free from long-term debt. Its price-to-earnings ratio of 32.9 does not appear too high for the kind of dominant market position that it holds. Given all these facts, the stock is clearly a hold from a long-term perspective.

Disclosure: No positions.

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This article first appeared on GuruFocus.