FB Stock: One Big Risk For Facebook Inc Investors

Regulatory challenges remain the biggest threat to Facebook Inc (NASDAQ:FB) stock in the short-term.

FB Stock One Big Threat To Facebook Inc Investors

Things have not improved for social media giant Facebook Inc (NASDAQ:FB) over the last few weeks. Facebook is under pressure from several quarters, including the Russia investigations and European tax authorities. The revelations that Russia linked fake accounts purchased $100,000 worth of ads which reached 10 million Americans and was targeted at swing states with propaganda on everything from race to guns to gay rights has been a major blow to Facebook's reputation.

Given the multiple controversies, FB stock has hit a break after 50% rally. Facebook stock has not gone anywhere since the end of July. However, in the last couple of weeks, Facebook stock has shown some signs of building momentum, gaining over 5%. FB stock is back above its 20-day moving average support line while MACD has made a bullish crossover. The question now is, can the recently gained momentum sustain going into the earnings?
FB stock chart

Controversies continue to remain a headwind.

The controversies around Facebook refuse to die down. In fact, it seems like the social media giant is getting embroiled in different controversies every other day. Facebook found itself in another Russia related controversy recently. According to James Lankford, a senator from Oklahoma, last month Russian internet trolls sought to stir up passions in a debate over American football players kneeling in protest during the national anthem.

Facebook is trying to convince Congress that it can get things under control. It has announced guidelines which will make it harder for malicious actors to buy political advertising and conduct misinformation campaigns. It will now require its advertisers to post all of the ads they are running to promote transparency and has plans to hire 1,000 more moderators to review their content. However, several lawmakers are yet to buy Facebook's argument and are proposing regulations relating to political ads on social media.

There are also 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 tech giants terming them as monopolies. The support for regulation of big tech companies is bipartisan. Steve Bannon and Bernie Sanders both want big tech companies treated as public utilities. Senator Warren has accused big tech giants like Facebook of using their size to "snuff out competition."

Is Facebook Inc a media company?

Facebook is facing similar regulatory pressure in Europe. Britain is looking to regulate Facebook and Google as new publishers and not just platforms, meaning they could be held responsible for the content and regulated like traditional news providers, according to a spokesman of Prime Minister Theresa May. A report on Tuesday by consultants Enders Analysis said that 6.5 million British internet users claimed to mainly source their news from Facebook.

U.K is also looking to force social media companies like Facebook to reveal "the scale of cyber bullying in the U.K. and face being made to pay the cost of dealing with it". Under the latest guidance by the U.K. government, technology companies will be required to publish an annual report on how they handle complaints and the extent of their efforts to moderate bullying or offensive content about children, women, gay people or religions. There is also a proposal of "industry-wide levy" on social media companies to raise awareness about cyberbullying and counter internet harms.

Taxing Time Ahead For Facebook Stock?

And to top it all, the European Commission is looking at hitting Facebook and Google with heftier tax bills. There are arguments for imposing 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." French finance minister, Le Maire said during a meeting. Under the proposed plan, companies would have to pay taxes on revenues in the 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. Tech companies could see a hefty increase in their tax bills under the new proposal, which will hit their bottom line.

Facebook stock remains a good long term buy.

Given the plethora of regulatory uncertainties and the negative sentiment, Facebook stock is likely to remain under pressure going into the Q3 earnings. The fact that, Facebook management has warned about the slowdown in the second half of the year is also not helping the sentiments. This is not to say that investors should sell Facebook stock. Facebook has several long-term growth drivers and is investing heavily in videos which could another growth driver. Facebook stock remains a good long term buy. However, regulatory uncertainty could keep Facebook stock in check in the short term.

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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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