<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Facebook‘s (NASDAQ: FB) stock surged nearly 60% this year, erasing nearly all its losses in 2018, as concerns about its long-term growth waned. The growth of Facebook’s core platform decelerated as legal costs and higher investments throttled its earnings, but the expansion of Instagram largely offset those worries.” data-reactid=”11″>Facebook‘s (NASDAQ: FB) stock surged nearly 60% this year, erasing nearly all its losses in 2018, as concerns about its long-term growth waned. The growth of Facebook’s core platform decelerated as legal costs and higher investments throttled its earnings, but the expansion of Instagram largely offset those worries.
However, Facebook was recently hit by two new headwinds — regulatory opposition to its Libra cryptocurrency plans and a $5 billion fine from the Federal Trade Commission. Those developments sound dire for Facebook, but I’ll explain why they shouldn’t sway its stock over the long term.
Image source: Facebook.
Libra can flourish without the U.S. market
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Facebook introduced Libra, an open-source currency developed by a consortium of companies, last month. That consortium includes payment and tech companies including Visa, Mastercard, PayPal, Uber, Lyft, and Spotify.” data-reactid=”26″>Facebook introduced Libra, an open-source currency developed by a consortium of companies, last month. That consortium includes payment and tech companies including Visa, Mastercard, PayPal, Uber, Lyft, and Spotify.
Facebook doesn’t own Libra or run the consortium, which is led by a nonprofit organization. To profit from Libra, Facebook is developing a virtual wallet called Calibra, which will be integrated into Messenger and WhatsApp. Unlike algorithm-defined cryptocurrencies like Bitcoin, Libra’s value is pinned to existing fiat currencies to reduce volatility.
The consortium states that Libra can resolve payment issues for the 1.7 billion people in the world who still don’t have bank accounts. It also claims that Libra payments will be faster, simpler, and cheaper than traditional money transfer options.
The introduction of Libra was met with opposition from lawmakers, Federal Reserve Chair Jerome Powell, and President Trump. Powell stated that Libra posed “many serious concerns regarding privacy, money laundering, consumer protection, and financial stability,” while Trump declared that “unregulated crypto assets can facilitate unlawful behavior.”
That resistance sounds like bad news for Facebook, but investors should remember two things. First, Libra and Calibra are long-term projects that have no material impact on Facebook’s near-term revenues — which mainly come from its advertising business. Second, Libra mostly targets other countries, especially developing ones, which have large unbanked populations.
Only 6.5% percent of American households didn’t have a bank account in 2017, according to the FDIC. For context, the World Bank claims that nearly half of the world’s unbanked adults live in just seven countries — China, India, Bangladesh, Indonesia, Pakistan, Nigeria, and Mexico.
Image source: Getty Images.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Facebook probably doesn't have high hopes for China, where its services are banned, or India, which is targeting cryptocurrencies with fresh regulations, but it could make progress in other markets with more relaxed regulations. In other words, Libra could easily flourish without U.S. users or the blessing of the U.S. government.” data-reactid=”48″>Facebook probably doesn’t have high hopes for China, where its services are banned, or India, which is targeting cryptocurrencies with fresh regulations, but it could make progress in other markets with more relaxed regulations. In other words, Libra could easily flourish without U.S. users or the blessing of the U.S. government.
A $5 billion slap on the wrist
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="But Libra isn't the only thing that bothers U.S. regulators. The Federal Trade Commission also launched a probe into Facebook regarding its security and data breaches in recent years, with a harsh spotlight cast on the Cambridge Analytica scandal.” data-reactid=”50″>But Libra isn’t the only thing that bothers U.S. regulators. The Federal Trade Commission also launched a probe into Facebook regarding its security and data breaches in recent years, with a harsh spotlight cast on the Cambridge Analytica scandal.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="However, the FTC recently agreed to end that probe with a $5 billion settlement. The Wall Street Journal reports that the settlement includes new restrictions on how Facebook treats user privacy but doesn’t demand broader government oversight of the tech giant.” data-reactid=”51″>However, the FTC recently agreed to end that probe with a $5 billion settlement. The Wall Street Journal reports that the settlement includes new restrictions on how Facebook treats user privacy but doesn’t demand broader government oversight of the tech giant.
The FTC’s $5 billion fine was the largest levied in the agency’s history, but the media widely ridiculed it as a slap on the wrist. After all, Facebook generated $55.8 billion in revenue and $22.1 billion in net profit last year, and the fine will probably be written off as a one-time charge.
More importantly, the FTC dropped its most damaging proposals — which included forcing Facebook to delete tracking data, restricting data collection, limiting targeted ads, restricting the flow of data between Facebook’s numerous apps, and making its board of directors responsible for overseeing privacy issues.
Facebook’s legal headaches in the U.S. aren’t over yet — it still faces an SEC probe regarding Cambridge Analytica, a criminal investigation into its data deals in New York, and a lawsuit from the Housing and Urban Development Department over housing discrimination in targeted ads. However, the FTC settlement — which the Justice Department still needs to approve — greatly reduces the risk of a sweeping antitrust case or a government-mandated breakup.
Growing companies will have growing pains
Facebook is experiencing tough growing pains as its ecosystem expands and evolves, and it often seems like it’s struggling to control its creation. But this tech giant is still growing, and investors who stick with the stock and ignore the short-term noise from angry regulators could be well rewarded over the long term.
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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook, Mastercard, PayPal Holdings, and Visa. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.” data-reactid=”66″>Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook, Mastercard, PayPal Holdings, and Visa. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.
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