Since the beginning of the year, Facebook promotions (NASDAQ: FB) have risen in price by 34%, to 275 USD, and continue to trade in an upward trend. However, in the spring, the coronavirus pandemic led to a sharp drop in the value of securities to 140 USD, which made investments in the social network cheaper.
Impact of the pandemic on Facebook
Fears of the impact of the pandemic on the company were exaggerated, since Facebook is not an industrial enterprise, but a social network, whose users can enter the application at any time, and it does not matter where they are now: in quarantine at home or at work.
Boycott Facebook by advertisers
Yes, there was a risk of falling ad revenues due to the damage done by the pandemic to advertisers, as well as Facebook boycotts by companies such as Starbucks, PepsiCo, Coca-Cola, Diageo, Unilever and Verizon. But companies that have joined the boycott and urged the social network to closely monitor misinformation and hate speech are lost among 8 million other advertisers using Facebook platforms to promote their goods and services. The financial results for the second quarter are proof of this.
Facebook ended the second quarter with a net profit of 5.1 billion USD, which is almost double the level of the same quarter a year earlier. This event came as a complete surprise to market participants, as a result of which Facebook shares rose in price by 9%, to 255 USD, and a few days later their price increased by another 25 USD.
The companies were intent on boycotting the social network further, but Zuckerberg reassured investors and said it would not have a significant impact on Facebook’s earnings.
Facebook enters the e-commerce market
The pandemic has prompted quarantine by governments in many countries, affecting the service industry and offline retail business. But at the same time, there was a sharp increase in income for those who are engaged in e-commerce. Facebook also decided to enter this market and launched the new Facebook Shops platform in May. Following this, on August 25, the company announced that it is teaming up with Big Commerce to launch a feature on Instagram that will allow users to buy products without leaving the app. As a result of these actions, the price of securities rose above 300 USD per share, and analysts revised their forecasts and set a target price for the growth of shares at 330 USD.
As a result, from March to August, Facebook investors received mostly good news, due to which the value of shares of the social network was constantly growing in value, and it seemed that nothing could stop them.
The situation changed when the electoral race in America entered an active phase. Social media is actively used as a platform for political advertising. This imposes certain risks on the company, which can then be accused of supporting one of the candidates. As a result, Zuckerberg announced that he would ban political advertising a week before the presidential election. This is one of the steps taken by the company to prevent interference in the elections and to encourage voting for one of the candidates.
In 2016, Facebook already faced criticism for its attitude towards the presidential race, which was won by Donald Trump. In particular, it was indicated that Russia used the platform to spread disinformation. The day Zuckerberg announced the ban on political advertising, stocks fell 6%. Then the gradual decline in the value of securities continued. Apparently, investors decided not to risk it and wait for the end of the presidential race.
The elections were held on November 3, and already on the 4th of the month, Facebook shares began to rise in value. In three days, the securities gained 12%, again approaching 300 USD per share. The company also benefited from the fact that Joe Biden won the election, reducing the risk of tighter regulation of social media. At least that’s what it was supposed to be.
Lawsuit against Facebook
However, a month later, 48 US attorneys general and the Federal Trade Commission (FTC) filed lawsuits against the company, accusing the social network of violating antitrust laws. Instagram and WhatsApp were the stumbling blocks. Facebook is being asked to sell these apps.
It is indicated that Facebook, by buying Instagram and WhatsApp in the early stages of their development, eliminated future competitors. This is backed up internally by Zuckerberg’s 2008 email, where he writes, “Better to buy than compete.” And after acquiring Instagram, he noted that Facebook can always afford to buy promising startups in order to avoid competition in the future.
Zuckerberg, in his defense, points out that WhatsApp and Instagram have become popular thanks to their integration into the Facebook company.
The trial is just beginning and there are still many sessions ahead. But what matters here is the very fact that regulators are paying attention to tech giants.
Two months earlier, the US Department of Justice filed a lawsuit against Google, in which the company is accused of crushing competitors at the expense of its dominant market position.
Cases of this magnitude were also initiated against the company AT&T (NYSE: T) in 1974 and Microsoft (NASDAQ: MSFT) in 1998.
Lawsuit against AT&T
As a result of a lawsuit by the US Department of Justice against AT&T, which was caused by the company’s monopoly in the telephone services industry, the corporation was divided into 7 regional companies. As a result, competition in the telecommunications market has grown, and the cost of communications services has decreased. This gave impetus to the faster development of the industry. After the division, the capitalization of AT&T decreased from 150 billion to 34 billion USD.
Claims against AT&T began in 1910, but in the end the legal wars stretched out for decades. The plaintiffs had to wait a very long time for a meaningful result.
Lawsuit against Microsoft
Microsoft has also been accused of having a monopoly on the computer software market. The corporation demanded that PC manufacturers install their own Internet Explorer (IE) browser in exchange for the opportunity to obtain a license for Windows 95. For me, an average user, at one time it was generally a revelation to find out that there were other browsers besides IE. Now it is already customary for us to choose which browser to work with under the Windows operating system.
To be divided?
Investors in the market are divided over the outcome of the lawsuit against Facebook. Some believe that this event is unlikely, and the arguments they give are quite weighty.
Others insist that the FTC will be able to convince a federal judge of Facebook’s intentions to remove competitors through the purchase of potentially “dangerous” startups. As a result, the result will be a division of the company.
First of all, it should be noted that the acquisitions of WhatsApp and Instagram were approved by the antitrust authority. If the company is now divided, it undermines the credibility of the decisions of the antitrust regulator. Other transactions can be canceled according to the same principle.
WhatsApp and Instagram are fully integrated with Facebook; they do not function as separate units. Statistics on the number of users, ad revenue, etc. published as general statistics for the Facebook company. Therefore, separating these two applications from Facebook is not easy.
There were precedents for the separation of companies in history, but this concerned only separate divisions that functioned independently, but had general funding. General Electric is an example. One division produces engines for airliners, while the other builds power plants. Both of these divisions operate under the same brand, but their revenues are split in quarterly reports. And the type of activity is also different.
Another compelling reason for Facebook is competition. The company currently has competitors in the face of such social networks as Twitter, Tik Tok, Snapchat, Pinterest and others. Facebook does not control the social media market, but is only its leader. Any user has a choice of where to register an account.
As a result, investors who do not believe in the divestiture of the company expect lengthy litigation, which will result in a fine. But this event will not have a significant impact on Facebook’s market share.
Supporters of the company split speculate that the plaintiffs will be able to convince a federal judge of Facebook’s intention to quell competition by buying up companies early in their development. They have internal Zuckerberg emails and testimonies from the former Instagram owner.
Among other things, the government is intimidated by Zuckerberg’s enormous “power”. After all, Facebook has 2.7 billion monthly active users. One person shouldn’t have that kind of power. Today he has good intentions, and tomorrow he can unleash a war, misleading users.
But the main reason for the litigation lies outside of Facebook. This lawsuit speaks of the escalation of regulatory pressure on technology companies, which began under Donald Trump and, apparently, will continue under Joe Biden. The plaintiffs will do their best to win this case and make it clear to other companies that they should not get carried away with monopolizing the market.
What threatens the sale of WhatsApp and Instagram?
If the court orders Facebook to sell WhatsApp and Instagram, this will have a very negative impact on the company’s earnings and their shares. Some investors want to take profits, others want to capitalize on Facebook’s problems. Both will lead to a sharp drop in the value of securities. Facebook does not pay dividends, so for investors buying their shares, the only source of income is the rise in the value of securities. And securities can grow only if investors see the potential for that growth.
In the early days of Facebook, that potential was the number of new registered users. When this metric stopped growing, Facebook replaced it in quarterly reports with statistics on the number of active users. Thus, we can say that Facebook is already close to the registration limit, and the company needs to look for new sources of revenue growth, as a result of which the idea to enter the e-commerce market appeared.
However, there is another way – the division of the company, after which it will be necessary to start all over again, and the growth potential will again become huge. But will Facebook be able to dominate the social media market a second time? Will investors put their trust in Zuckerberg again, or would they prefer to invest in Instagram without Facebook?
By the way, Internet Explorer had 90% of the browser market share in 1999, and now it is 4.71%. The Department of Justice has done its job. Other browsers have appeared on the market, they compete with each other, which benefits both the development of the market in general and users who have a choice. Time will tell whether Facebook will face the fate of IE.
Technical analysis of Facebook stock
The trial has just begun and in this situation it is still difficult to draw conclusions. But the answer may come from technical analysis. It is very important to observe the behavior of investors on paper.
As strange as it may sound, according to technical analysis, there is also uncertainty in the further movement. On the day timeframe, a “Triangle” pattern has formed. This figure can indicate both an increase in the value of shares, and its fall. It all depends on which of the pattern lines will be broken.
At the moment, the upside potential is higher because there is an uptrend indicated by the 200-day moving average. If stock quotes are able to break through the upper line of the triangle, it will indicate investor optimism about the company and that they are betting on the development of e-commerce in Facebook.
The breakdown of the lower line of the pattern will be an alarming signal for long-term investors, and the subsequent breakdown of the Moving Average may even lead to the formation of a downward trend. In this case, investors will lay the risks of a possible division of the company.
In the short term, as long as there are good quarterly reports, Facebook stock will be in demand. But the news coming from the courtroom will remind investors of future risks. In the current situation, it is better to take your time.
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