Fb buyers need not worry a breakup
A coalition of states is suing for an attempt to break into Facebook Inc. – the most recent event to question the company’s future. If Microsoft Corp.’s antitrust investigation is analog at all – over three years from complaint to settlement – it can take a long time before the result of all of this is known. And it could be years before we see the ultimate impact on Facebook.
For investors in stocks of the social media company, the future may look different from the kind of innovation and industry dominance we’ve seen over the past decade. Nonetheless, it might prove good for shareholders if the company’s focus shifts more to optimizing its operations for near-term profitability with an emphasis on financial engineering.
Despite Alphabet Inc.’s enviable growth rate and online advertising duopoly with Google, Facebook stock has a relatively pedestrian-centric rating. While there is significant uncertainty about how economic growth will play out over the next year, Facebook shares are valued at 24.5 times its estimated adjusted earnings for 2021, compared to the overall S&P 500, which closed at Jan. – or 22 times the estimated 2021 profit. Facebook’s multiple is lower than companies like Walmart Inc. or Coca-Cola Co., which may suggest that there is reasonable regulatory risk built into the stock already.
Among the various possible outcomes of Facebook’s antitrust challenges, one could be that it remains a company whose core advertising business is secure while its ability to intervene in emerging areas is limited. Such is arguably the case with Microsoft, which missed the internet, social media, and smartphones in the 2000s while keeping the major cash cows of Windows and Office intact.
Despite all of these innovations, Microsoft’s revenue soared from $ 15.3 billion in 1998 to $ 60.4 billion in 2008. In the same way, a less innovative Facebook is likely to continue to generate years of revenue growth if it did follows the secular trend of growth in digital advertising.
While liquidation of the company – as likely as it may be – would be humiliating and take power out of Chief Executive Officer Mark Zuckerberg, it could be a value-adding event for shareholders, much like the split between EBay Inc. and PayPal Holdings Inc.
Facebook shareholders would receive shares in the separate entities: the main social network known as Facebook Blue, as well as Instagram and / or WhatsApp. Blue for Facebook could be the eBay marketplace business for eBay, a slow growing business that is generating a lot of profit.
Blue is also the division that is getting the company into the greatest trouble on political and controversial content. If it were split off from the rest of the company, it could roll out a dividend and focus on cash generation and share buybacks. With interest rates this low, the company could borrow tens of billions of dollars at cheap rates to opportunistically buy back more shares, much like Apple has done in recent years.
Meanwhile, growth-minded investors could access faster-growing, under-monetized Instagram and WhatsApp without the clutter of Facebook Blue. Both companies appear to be on the verge of better revenue from their platforms, with Whatsapp showing particular promise in countries like India. And as companies mature, they too could get into the dividend and buyback game.
Facebook no longer needs world-changing innovations for its stock to work for investors. While emerging platforms like TikTok and Snapchat are increasing their ad revenue, and Amazon has developed a billion dollar advertising platform, there’s no evidence that Facebook is at risk of its network disappearing anytime soon.
When innovation-minded investors fret about antitrust risks and ditch Facebook’s shares, value investors should be there to pick them up, with the investment case tied to returning capital to shareholders rather than taking over the world. This is the kind of victory that both Wall Street and Washington could leave behind.
Conor Sen is a columnist for the Bloomberg Opinion.
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