Why an antitrust breach might be good for Facebook’s stock
The U.S. government, led by the Federal Trade Commission (FTC), has taken legal action against Facebook (NASDAQ: FB), claiming that Facebook is an illegal monopoly that should be remedied – perhaps by breaking it down.
This would appear to be a negative development for the social media company, which owns several popular internet platforms including Facebook.com, Instagram and WhatsApp. However, a Facebook break-up could actually unleash some of the hidden value in the company’s conglomerate structure.
Facebook vs. FTC
In the government case, the FTC accused Facebook of anti-competitive behavior and dominance within the social media platform and digital marketplace. According to Ian Conner, director of the FTC’s Competition Bureau, “[O]Our goal is to reverse Facebook’s anti-competitive behavior and restore competition so that innovation and free competition can flourish. “It seems the FTC thinks the company is starting to show signs of becoming a monopoly, which goes against what the government wants.
The FTC believes that Facebook suppresses competition in its industry by preventing competition from developing in the first place. At the center are the acquisitions of Instagram and WhatsApp by Facebook. The theory goes that the main reason Facebook acquired these companies was to prevent them from challenging Facebook’s dominance on social media. Maybe if Facebook hadn’t acquired Instagram in 2012, it wouldn’t have that much market share in online advertising.
Take Break (NYSE: SNAP), the company that owns the popular Snapchat app, for example. In 2013, Facebook has offered to acquire Snap for $ 3 billion, which Snap refused. Instead, Snap went public on its own, and the two companies have been in fierce competition ever since. Today, Snap’s market cap is nearly $ 80 billion.
Prosecutors want to remedy Facebook’s alleged monopoly position by separating its core assets. Namely, regulators would like Facebook.com, Instagram, and WhatsApp to function as separate companies, which they believe would limit the overall market power wielded by the company.
Why a breakout could be bullish
The logic behind why a breakup might be good for Facebook relies primarily on valuation. By most conventional metrics, Facebook is trading for the lowest valuation multiples of its peers. The graph below shows that on a enterprise value (EV) in relation to turnover, Facebook exchanges less than nine times, where Pinterest (NYSE: PINS) and Snap trade for more than double the income multiple.
It’s hard to know for sure why Facebook is trading for such a low valuation multiple relative to its peers, but there are some theories.
First, Facebook is a conglomerate of several different platforms, which makes valuation more difficult – and as a result, investors put a discount on the valuations they use.
Second, Facebook is a combination of a slower growing Facebook platform and faster growing Instagram and WhatsApp. Investors typically assign lower valuation multiples to slower growing companies and may give the company as a whole a lower multiple as the slower growth of facebook.com hides the growth speed of Instagram or WhatsApp. .
Finally, with a total market cap of over $ 700 billion, Facebook may be just too big for enterprising investors to find it appealing. The law of large numbers would suggest that Facebook can only get much bigger, and therefore investors could reduce the value of Facebook due to its already large size.
All of this suggests that Facebook could be worth more if the FTC succeeds in separating its assets. Perhaps the faster growth of Instagram and WhatsApp could trade for much higher valuations – similar to Snap – and investors may find the main Facebook app more appealing as a standalone business.
I don’t know what will happen
It’s interesting to speculate on what could happen with the FTC lawsuit and what effects it could have. Facebook stock. The reality is that the FTC may not be successful in its lawsuit – or it could be successful to some extent and find a cure other than a breakup. However, it’s heartwarming to know that if Facebook is ultimately dismantled, it might not be so bad for shareholders.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.