Facebook data controversy drives stock to cheap levels

Facebook's shares were trading at about the cheapest they have been since the social network's initial public offering nearly six years ago.

Published: 21st March 2018 08:00 AM  |   Last Updated: 21st March 2018 08:00 AM   |  A+A-

With Tuesday's intraday decline, the stock was trading for about 21.5 times earnings estimates. (Photo | Reuters)

By Reuters

NEW YORK: The dive in Facebook Inc's shares may have created a rare buying opportunity for the high-flying social media company's stock - if investors believe a growing controversy over use of personal data will not severely damage the company's financial outlook.

Based on the company's estimated earnings, Facebook's shares were trading at about the cheapest they have been since the social network's initial public offering nearly six years ago.

The stock's woes continued on Tuesday, dropping 3.5 percent to sink as much as 17 percent below last month's all-time high, as investors grappled with risks facing Facebook following reports a political consultancy may have improperly gained access to data on 50 million users.

Facebook said on Tuesday it would face questions this week from the Federal Trade Commission (FTC) about the data acquired by Cambridge Analytica. It said it had no indication of a formal investigation.

The FTC is reviewing whether Facebook violated a 2011 consent decree it reached with the authority over its privacy practices, a person briefed on the matter told Reuters.

OakBrook Investments, which owns Facebook shares, will discuss in coming days whether to buy more following the sharp pullback, said Peter Jankovskis, co-chief investment officer of the Lisle, Illinois firm.

"We were expecting some increase in the costs of policing data and we thought the stock’s valuation was still cheap relative to what those costs would be," Jankovskis said. "They are going to be fighting on a political front to defend their actions and what they have in place, but I don’t see any really major changes to how they do business coming about out of this."

Investors are drawn to Facebook for its torrid growth expected over the next few years. After increasing revenue by about 50 percent a year on average over the past five years, Facebook is expected by analysts to increase revenue by at least 23 percent a year through 2020, according to Thomson Reuters data.

"There aren’t too many of those out there, particularly of Facebook’s size,” Jankovskis said of Facebook, whose market value fell below $500 billion on Tuesday but remains one of the biggest U.S. companies by market capitalization.

As of Monday, Facebook's shares were trading at about 22.6 times earnings estimates for the next 12 months, their cheapest level since dipping to 22.2 times in early 2017, according to Thomson Reuters Datastream.

With Tuesday's intraday decline, the stock was trading for about 21.5 times earnings estimates. Last year, it traded above 30 times forward estimates and nearly 60 times in 2014.

Facebook's premium over the S&P 500 technology sector, which trades at about 19 times forward estimates, was also the smallest it has ever been, according to Datastream.

"If you are an investor that does not have a stake in Facebook and maybe you have been watching the stock and you have wanted to own it but you just did not want to pay up for it ... that discount should be compelling," said Jason Ware, chief investment officer with Albion Financial Group in Salt Lake City.

The question facing investors is whether Facebook's financial outlook will weaken. For example, if the FTC finds Facebook violated terms of the consent decree, it has the power to fine the company thousands of dollars a day per violation.

None of the more than 40 analysts followed by Thomson Reuters had yet reduced their revenue or earnings estimates as the data controversy erupted over the past few days.

Indeed, the potential for tighter regulation or damage to Facebook's reputation was cause for concern, said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, which he said owned Facebook but was not buying any more.

"You just have to wonder whether the estimates that you see out there are accurate now or whether they will be negatively affected by the adverse publicity that the company is getting,” Tuz said.

Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago, said he would wait for at least a few weeks before deciding whether to invest in Facebook.

"You don’t know right now how much the government is going to get involved...," Nolte said. "You don’t know if the business model is going to change significantly."


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