Who knew Facebook Inc. had perfected such life-like androids? Mark Zuckerberg’s oddly robotic performance before congressional inquisitors spawned a new genre of Twitter humour, but also went some way toward reassuring Wall Street that his company would be able to navigate its latest scandal without lasting damage.
Now attention turns to a more mundane question: Is Facebook stock a buy?
The social-network’s shares have fallen 14 per cent from their high earlier this year because of the Cambridge Analytica scandal, in which data on millions of Facebook users were shared without their knowledge. But after the Zuckerbot’s carefully crafted answers to U.S. legislators, the threat of aggressive new legislation appears to be diminishing. Maybe, just maybe, it’s time to consider jumping in.
That, at least, is the contention of Aswath Damodaran, a finance professor at New York University, who literally wrote the book on investment valuation. He argues in a blog post that fair value for a Facebook share is now US$181, well above the US$167 range it was trading around on Wednesday.
Despite that cheery estimate, Prof. Damodaran is no cheerleader for the company. He assumes the Federal Trade Commission will fine Facebook US$1-billion. He also figures U.S. legislators will impose costly new data restrictions that will force Facebook to hire more people and substantially reduce its operating margins.
Prof. Damodaran acknowledges that the recent scandal has scared off some Facebook users. He also assumes the company will find it increasingly difficult to expand its already massive user base. For the purposes of his model, he figures the company’s revenue growth will slow to about 20 per cent a year over the next five years, less than half the 51-per-cent pace it has achieved over the past five years.
Even with all those downbeat inputs, his calculations still show Facebook shares to be a tempting buy, largely because he thinks most advertisers will stay put. If you have a different view, he has a spreadsheet on his website that allows you to alter his valuation model to reflect your own beliefs. Spend a few minutes with that spreadsheet and you begin to realize how tremendously strong the company’s core business truly is.
So are Facebook shares that magical thing – a stock with little downside and substantial upside? Before jumping in, you should consider the risk of a dramatic shift in regulation, one that would go beyond the more measured response envisioned by Prof. Damodaran.
In the United States, online services have sheltered for years under the protection of Section 230 of the Communications and Decency Act, a piece of 1996 legislation that exempts them from liability for just about anything their users choose to do. The law reflects a belief that online services are simply passive conveyors of information, much like phone companies. Just as a phone company isn’t responsible for the racial slurs your father-in-law delivers when he calls you up to complain about the state of the world, an online company is not liable for the opinions expressed by its users.
In the wake of Cambridge Analytica and the fake-news scandals, we now know that viewpoint deserves to be challenged. There are also increasing worries about the monopoly clout wielded by many tech titans, from Facebook to Alphabet Inc.
Regulators, especially those outside the United States, have every reason to crack down. The European Union’s General Data Protection Regulation, to take effect next month, strengthens privacy protection. It could well be the first in a series of blows aimed at the tech giants, ranging from higher taxes to the imposition of a fiduciary standard that would make information gatherers responsible for any misuse of user information.
It’s impossible to predict the pace or scale of such measures. For now, Prof. Damodaran’s model makes a compelling case for buying into Facebook. But don’t overlook the risks involved.