Facebook (FB) Stock: Earnings Trumps Politics

By October 21, 2019 Bitcoin Business
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Mark Zuckerberg - Al Drago / Bloomberg
Credit: Al Drago / Bloomberg

If you listen to the media, it seems that everybody hates Facebook (FB) right now. They are under attack from all sides and provide a rare example of bipartisanship, as Democrats and Republicans alike are criticizing it regularly. Unlike politicians, traders are looking at the company’s results rather than their reputation, so with earnings due out next week, this week looks like a good opportunity to buy the stock.

CEO Mark Zuckerberg will be on Capitol Hill this week, testifying before the House Financial Services Committee. When the CEO of a major company is hauled up before Congress, it is rarely, if ever, a good thing. They tend to be asked to appear so that politicians can rail against them in some way, and this is no exception. Presumably, given the nature of the committee, Zuckerberg will ostensibly be there to talk about Facebook’s plans for a digital currency, known as Libra, but I am sure there will also be no shortage of grandstanding criticism about the site's content and the company's policies.

There is no doubt that there is room for improvement on that front, and Zuckerberg himself has said as much. In a speech at Georgetown University, he did just that, but also pointed out that Facebook and WhatsApp are frequently used by protesters around the world to communicate. He contrasted that to platforms like Chinese-owned TikTok, which is subject to government censorship.

Most of the coverage of that speech looked like this New Yorker piece, which asserted that Zuckerberg "...still doesn’t get it." The speech itself is evidence that what Zuckerberg does get is that Facebook has an image problem, above all else. Like the author of that piece, I feel that Zuckerberg’s attempt to position the company as a defender of free speech gives off a somewhat cynical feel, but he does have a point when he contrasts Facebook with a company like TikTok.

Still, the most likely outcome of all the political and media criticism is that Facebook is in someway regulated with regard to content. However, at least for a few months, that is unlikely to hurt the stock. Most people's instinct to any kind of regulation is that it is bad for the business concerned, but in this case, the opposite is true. Regulation would actually remove a lot of the uncertainty around FB and reduce the need for, and therefore the cost of, self-policing.

FB has lost around eight percent since their last earnings release on July 24, but the moves that traders and investors should be paying attention to are those that came in the runup to that release and the previous one in April.

FB 1 YTD chart

The simple fact is that while politicians and talking heads keep criticizing, people keep using Facebook’s platforms, and advertisers keep paying to be on them. FB continues to grow revenue, not an easy task coming off such a massive base. There are headwinds for Facebook though, and if the Congressional committee members can restrain themselves from making speeches long enough to ask some pertinent questions, we will learn something about one of them this week.

Libra is an interesting idea, but it has very few friends right now. It has been criticized by the usual crypto-skeptics, and for the same reasons that they told us that Bitcoin (BTC) was going to zero years ago. It will, they say, be used by drug dealers and terrorists. That argument is as silly for Libra as it was for BTC. It is not that cryptocurrencies aren’t used by bad people, it’s just that nobody is proposing outlawing cash, which is the currency that is actually most used by said bad people.

Ridiculous arguments aside, there are problems with Libra. Its best chance of success was because several payment companies, including giants like Visa (V) and Mastercard (MA), were going to be partners. Now that they have pulled out, the project is taking on a different tone. There is even a chance that it will be abandoned altogether, as that may be a useful bargaining chip for Zuckerberg when dealing with politicians.

Given that and the nature of these testimonies, it is quite likely that FB will fall even further this week. If it does, it will be an opportunity for investors. Once the political stuff is out of the way, the market will focus again on the upcoming earnings from Facebook, and, on past evidence, that will cause a significant run up in the stock, making headline-driven weakness a good opportunity to buy at a discount.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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