U.S. Markets close in 6 hrs 16 mins

Growing Data Center Network Makes Facebook Stock a ‘Buy’

Dana Blankenhorn

Facebook (NASDAQ:FB) stock is the little brother of the “Cloud Czars.” With a market cap of $534 billion, Facebook trades at 31.7 times last year’s earnings. This is helped by a balance sheet that showed $41 billion in cash and no debt in June, even while the company spends capital at a $15 billion per year rate.

FB Stock: 3 Big Reasons To Buy Facebook Stock Below $200

Source: rvlsoft / Shutterstock.com

Facebook’s rate of capital spending growth is extraordinary. The company’s capital budget was $293 million in 2009. In 2018 it was almost $14 billion.

Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) gets primary credit for creating the cloud concept. Amazon (NASDAQ:AMZN) has turned the cloud into a market. But no company has been as dedicated to pushing cloud technology as Facebook. Its Open Compute Project, launched in 2011, continues to push cloud costs down.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Yet none of the Cloud Czars — not Microsoft (NASDAQ:MSFT), not Alphabet, not Amazon, not even Apple (NASDAQ:AAPL) — is as hated as Facebook.

Blame the Free Web

Many have come to believe that Facebook is partially responsible for the election of President Donald Trump. Facebook CEO Mark Zuckerberg later testified that he believes Facebook did not “do enough” to prevent disinformation and fake news articles from swaying election results.

While Alphabet is actively pushing beyond its free web roots, Facebook is doubling down on all things free. As politicians call for the breaking up of the free web’s giants, Facebook is choosing to more tightly integrate its ancillary services.

This doesn’t mean Facebook is ignoring the threats. In July, Facebook agreed to pay $5 billion to settle a Federal Trade Commission investigation into its privacy practices. In the aftermath of this fine, Facebook is changing its default settings on photos, so it won’t automatically use facial recognition software to tag photos. This will ease the automatic collection of biometric data. Facebook is also considering hiding the likes on its news feed and is meeting with government officials trying to protect the 2020 election.

In general, however, Facebook is showing government the same blank, bland face Zuckerberg showed in Congressional testimony last year. It tells the government what it thinks lawmakers want to hear but otherwise does what it wants. Exasperated, Oregon Senator Ron Wyden recently suggested that Zuckerberg belongs in prison.

The Facebook Fightback

Under the surface, Facebook is fighting back.

It is paying for a new series of fact-based media templates in Europe as part of its Facebook Watch platform. It has launched pop-up windows on its social media platforms to counter misinformation about vaccines. Facebook has also issued a white paper on data portability — the notion that a user should be able to move their data from Facebook to another platform — in response to growing demand.

Facebook is often used for phishing. Picture friends’ faces popping up through Messenger, earnestly asking for money or personal information. I have personally faced several of these phishing attempts and twice almost gave hackers hundreds of dollars as a result.

Mainly, Facebook continues to treat political problems as technical ones. After this summer’s Messenger Kids breach, which exposed thousands of kids to unauthorized users, its response was a technically focused letter.

The test of whether this attempt to fight back is working may be Libra, its blockchain project. Libra seeks to replicate services already available from Chinese rivals like Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY). While trying to get support, Facebook has said blockchain technology will protect payments and lower costs. The European Union is already investigating Libra to see if it harms its competitors, even before its launch.

FB Stock’s Secret Sauce

While there are analysts who think Facebook should double down on services, say by buying Yelp (NYSE:YELP), it is Facebook’s data centers and its cloud network that hold the key to its future.

That network now includes two data centers in Europe and an 11-story center in Singapore, all built with the low-cost standards created by the Open Compute Project.

Analysts will continue to look at Facebook through the front door of political controversy and privacy policies. They need to look instead at the back door of Facebook’s data center footprint.

If the former is too deep and technical for you, Facebook is a buy.

Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, MSFT AMZN and BABA.

More From InvestorPlace

The post Growing Data Center Network Makes Facebook Stock a ‘Buy’ appeared first on InvestorPlace.