- Antitrust charges were filed against Facebook for anticompetitive behaviour relating to acquisitions that stifled competition, and providing selective access to its APIs.
- In a worst-case scenario, WhatsApp and Instagram could be divested, which would be negative for total shareholder value in my opinion.
- However, I think the worst-case scenario is unlikely, and Facebook has various factors working for it in its case against the government.
- Facebook comes out tops in a ‘Rule of 40’ comparison, due to sector-leading margins combined with strong sales growth. Valuation at 10x P/S is compelling when compared to peers.
- Any selloff should be a dip buying opportunity of a quality company with core competitive advantages in the social media space. Buy Facebook.
On 9 December 2020, Facebook (FB) was accused by the Federal Trade Commission (abbreviated henceforth as the FTC) and a group of 48 US attorneys-general of engaging in anticompetitive behaviour which violates Section 2 of the Sherman Act. Instagram and WhatsApp may have to be divested in a worst-case scenario. However, I believe that this is unlikely, and any selloff would be an opportunity to buy on dips. I explain my rationale below.
Summary of charges
The Federal Trade Commission and a group of 48 US attorneys-general have filed antritrust charges against Facebook. You can find the full statement from the FTC here but in summary, the charges comprise:
- Facebook allegedly conducting anticompetitive acquisitions, including those of Instagram in 2012 and WhatsApp in 2014, where Facebook was unable to compete with these platforms on its own merit and hence decided to acquire them instead, which served to stifle the competitive threats from both the acquired companies and other competitors (as it became harder to other competitors to gain similar scale).
- Anticompetitive platform conduct, where Facebook has, in the past, blocked certain third-party software developers’ access to Facebook’s APIs as a result of their development of competing social media functionalities, and/or connecting with or promoting other social network services.
The FTC is seeking a permanent injunction that could order Facebook to:
- Divest certain assets, including but not limited to Instagram and WhatsApp
- Provide other forms of relief to “remedy the harm” to competition
- Provide prior notice and seek approval for future M&As
- Cease the practice of selectively providing access to APIs
The US attorneys-general charges are very similar so I shall not go through that in detail here.
The most significant implication of the charges against Facebook would be that of forced divestment of acquired assets, as these assets are the ones that hold the greatest growth potential. So let’s discuss what this could mean.
Why I don’t think the worst-case scenario will happen
There are a few reasons why I think the odds are that Facebook will not be found guilty, and get a slap on the wrist instead.
First, Facebook’s acquisitions of Instagram and WhatsApp were already approved by antitrust regulators at the time of purchase. Asking for a review now would be akin to revoking the old judgement, which would be unprecedented, and would send ripples throughout the corporate world, resulting in lower appetite for M&A.
Second, US law recognises that monopolies are not unlawful if the monopoly was a result of superior skill. In the case of Instagram, the numbers seem to indicate most of its growth has been a result of its management under Facebook. Instagram had 2% of current users at the time, 13 employees and no revenue at the time Facebook bought it.
Finally, competition amongst social media platforms is actually at a high point. There are more platforms competing for eyeballs now than in 2012-2014 when the acquisitions of Instagram and WhatsApp took place. Take TikTok, which was only launched in September 2016 but has already amassed 800 million users worldwide, of which 650 million are from outside of China. Snapchat has increased its user base by a factor of 5.6x from 1Q14 to 3Q20, with 249 million active users as of 3Q20. Twitter MAUs have continued to rise, albeit more slowly than its social media peers, with 353m users as of 3Q20. These to me form pretty clear evidence that competition among social networks remains healthy, and there is no ‘winner-takes-all’ situation developing.
Where I could be wrong
The lawsuits against Facebook are unprecedented in the sense that social media platforms are a relatively new feature in the world, and don’t operate on the typical model of charging consumers for a product. Instead, the consumers are the product, and companies pay for eyeballs on advertising. Thus, historical laws and cases may be abandoned in favour of more forward-looking legislation.
One risk in particular that I see would be that of strong political willpower, especially if the democrats manage to take a majority in both the Senate and the House after the Georgia runoffs in January. Given Facebook’s unparalleled influence on society in terms of what the layperson sees on social media and how that can influence key events like elections, Congress might be keen to begin chipping away at Facebook’s power, or at least keep the pressure on Facebook in order to maintain some form of leverage over the social media giant. While Joe Biden is no Elizabeth Warren, the Democrat contingent is home to many advocates for the breaking up of Big Tech. If public sentiment turns increasingly negative on Facebook (perhaps through more exposure to shows such as Netflix’s ‘The Social Dilemma’), the Democrats might also ramp-up their efforts to tear Facebook apart.
In other words, political willpower and the voice of the people could potentially override whatever ‘legal’ or ‘rational’ logic is applied to the case at hand, which I spoke about in the previous section.
Facebook continues to confront election rated censorship controversies. However, it remains a staple in technology and a blue-chip stock with enticing upside.
Our AI systems rated Facebook C in Technicals, B in Growth, B in Low Volatility Momentum, and B in Quality Value. The stock closed down 6.31% to $263.11 on volume of 47,299,002 vs its 10-day price average of $274.26 and its 22-day price average of $269.78, and is up 25.42% for the year.
Revenue grew by 11.71% in the last fiscal year and grew by 94.27% over the last three fiscal years, Operating Income grew by 19.88% in the last fiscal year and grew by 42.33% over the last three fiscal years, EPS grew by 36.52% in the last fiscal year and grew by 62.85% over the last three fiscal years.
Revenue was $70697.0M in the last fiscal year compared to $40653.0M three years ago, Operating Income was $23986.0M in the last fiscal year compared to $20203.0M three years ago, EPS was $6.43 in the last fiscal year compared to $5.39 three years ago, and ROE was 19.96% in the last year compared to 23.86% three years ago.
Forward 12M Revenue is expected to grow by 16.71% over the next 12 months, and the stock is trading with a Forward 12M P/E of 26.3.
Overall, the bias in prices is: Upwards.
By the way, prices are vulnerable to a correction towards 268.52.
The projected upper bound is: 295.73.
The projected lower bound is: 253.89.
The projected closing price is: 274.81.
A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 5 white candles and 5 black candles. During the past 50 bars, there have been 22 white candles and 28 black candles for a net of 6 black candles.
An engulfing bearish line occurred (where a black candle’s real body completely contains the previous white candle’s real body). The engulfing bearish pattern is bearish during an uptrend. It then signifies that the momentum may be shifting from the bulls to the bears.
If the engulfing bearish pattern occurs during a downtrend (which appears to be the case with FACEBOOK INC A), it may be a last engulfing bottom which indicates a bullish reversal. The test to see if this is the case is if the next candle closes above the bottom the current (black) candle’s real body.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 52.4668. This is not an overbought or oversold reading. The last signal was a sell 10 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 47.24. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 73 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 5 period(s) ago.
Rex Takasugi – TD Profile
FACEBOOK INC A closed down -1.190 at 274.480. Volume was 21% below average (neutral) and Bollinger Bands were 51% narrower than normal.
Open High Low Close Volume 277.070 280.440 273.610 274.480 16,377,844
Technical Outlook Short Term: Neutral Intermediate Term: Bearish Long Term: Bullish
Moving Averages: 10-period 50-period 200-period Close: 277.72 275.73 238.20 Volatility: 20 48 59 Volume: 16,690,099 18,758,224 23,867,544
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
FACEBOOK INC A is currently 15.2% above its 200-period moving average and is in an downward trend. Volatility is low as compared to the average volatility over the last 10 periods.
Our volume indicators reflect volume flowing into and out of FB.O at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bearish on FB.O and have had this outlook for the last 4 periods.
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