Facebook Inc: FB Stock Rally Hits A Break. Taxing Time Ahead?

Facebook Inc (NASDAQ:FB) is embroiled in several controversies which are keeping FB stock in check for now.

Facebook Inc FB Stock Rally Hits A Break. Taxing Time Ahead

After rallying by over 50% this year, shares of social media giant Facebook Inc (NASDAQ:FB) have taken a break. The stock has gone nowhere since the end of July. There is currently a lot of negative commentary surrounding FB stock, from Russian ad controversy to the threat of actions against digital monopolies and higher tax bills for tech companies like Facebook and Alphabet Inc-C (NASDAQ:GOOG).

These controversies have distracted investors from the core fundamentals of Facebook. Facebook stock has delivered strong profitable growth and despite "ad load saturation" on the core Facebook.com platform, has several strong growth drivers. Facebook stock is part of our top stocks to buy from the tech sector. Our top stocks portfolio has outperformed Nasdaq Composite over the past years. While there are headwinds especially on the legal and regulatory front, FB stock still looks a good long-term play.
Facebook stock returns performance comparision with Nasdaq Composite

Is Facebook Inc. a monopoly?

There is an increasing number of voices calling for regulating internet behemoths such as Facebook and Google like a utility while some others are calling for anti-trust actions against these giants. The support for regulation of big tech companies is bipartisan. Steve Bannon and Bernie Sanders both want big tech treated as public utilities. Senator Warren has accused big tech giants like Facebook of using their size to "snuff out competition."

For now though, anti-trust actions, at least in the U.S are unlikely. In a speech given in Washington DC on September 12, Maureen Ohlhausen, the acting chair of the US Federal Trade Commission ruled out any action for now, saying "Given the clear consumer benefits of technology-driven innovation, I am concerned about the push to adopt an approach that will disregard consumer benefits in the pursuit of other, perhaps even conflicting, goals." US antitrust policy is generally very tolerant of companies which continue to bring down the cost for consumers, irrespective of their size or market share. However, the lawmakers in Europe may take a different view.

Taxing Times Ahead For Facebook Stock?

The European Commission is looking at hitting Facebook and Google with heftier tax bills. According to reports, French Finance Minister Bruno Le Maire argued that the European Union should impose a tax on revenue, rather than profits of the digital industry by mid-2018.  "I favor imposing immediate levies, similar to sales tax, but only as a temporary solution before we reach a global agreement." Le Maire said during the meeting.

Under the proposed plan, companies would have to pay taxes on revenues in any country where they do business instead of the current setup, which only requires firms to pay taxes on profit that they report in what are often low-tax countries. Under the new proposal, tech companies could see a hefty increase in their tax bills, which will hit their bottom line. The proposal is said to have the backing of 10 European nations including Germany.

The European Union has been regularly complaining that American tech companies are not paying up their fair share of taxes. The European Commission has been trying to close all the tax loopholes. The Commission had last year, famously ordered Apple to pay as much as 13 billion euros ($15.5 billion) plus interest in back taxes. The commission, the EU's executive arm, has been tasked to draw up a set of solutions, including the French proposal, in time for an EU summit in Tallinn on September 29. Many finance ministers argued that they are feeling cheated as big corporations are easily able to avoid taxes.

However, while this proposal has a strong backing, the road ahead is very difficult as many countries are calling for caution and wider discussions. The main factor currently in favor of the big tech companies is that all the 28 current members of the EU need to agree to initiatives concerning taxation, meaning one country alone could block the whole plan. The finance ministers of Denmark and Luxembourg have already hinted that they would like to proceed more cautiously.

Ad targeting could get affected.

There are also several questions regarding Facebook's privacy policy and the use of personal data for targeted marketing. The company is facing regulatory scrutiny throughout Europe. It was earlier fined 150,000 Euros by France's data protection watchdog, CNIL. In a statement, the Watchdog said: "In particular it has been observed that Facebook proceeded to a massive compilation of personal data of internet users in order to display targeted advertising."  The Belgian Privacy Commission is now seeking judicial enforcement of its recommendations over Facebook's tracking of users and non-users through cookies, social plug-ins and pixels. Targeting personalized ads and content is one of Facebook's core competency. Facebook is able to achieve this by collecting a massive amount of personal data from users. Any limitation on collection and use of data could adversely impact Facebook's targeting efficiency and ad dollars.

The fake account and Russia ads.

Facebook is also embroiled in another controversy relating to the Russians meddling with U.S elections. Earlier this month, Facebook came out with a statement saying that it found about $100,000 in ad spending connected to fake accounts linked to Russia. These ads were aimed to stir political controversy in the U.S. ahead of last year’s presidential election. These revelations have brought Facebook under pressure with several lawmakers calling for laws to regulate Facebook ads.

Facebook and other social-media companies aren’t subject to the regulations on political advertising developed long ago for broadcasters. Tightening of regulation can hurt Facebook since most of its users and revenues come from U.S and Canada. This is also likely to keep the company distracted and force it to commit additional resources towards investigating fake accounts and fake news.

All these factors could keep Facebook stock in check for now. But despite these headwinds, Facebook stock still has strong growth drivers in the form of Instagram, Messenger, and WhatsApp. The company is also investing in videos and other media content for driving growth. Long-term investors should consider buying Facebook stock on dips.

Kumar Abhishek Kumar Abhishek   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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