After the trade war squabble in May, the first trading day of June 2019 has seen Facebook’s share price dropped by 7.5% in 1 day.
News reports have come out that Facebook is subjected to antitrust probes by the Federal Trade Commission. With that, a fine of between $3 billion to $5 billion was touted as possible.
The antitrust probe is an action by the government to pull in on the actions of tech companies regarding their use of data. On the first day of trading, a 7.5% drop in Facebook’s share price reduced their market cap by $40 billion to $833 billion.
From 2019’s high of $198.48, Facebook’s share price has decreased about 17.3% after Monday’s trading.
The 17.3% drop has reduced Facebook’s PE to 24.3.
Over-reaction or expected reaction?
Investing is very simple, all you have to do is to buy companies at a reasonable price when the stock market presents you with the opportunities.
Such opportunities are presented when the market over-reacts. To decide if the 7.5% drop is a over-reaction or expected reaction, we shall take a look at how the fine will affect the company.
With little details confirmed, we shall work with a $5 billion figure.
At the latest 10-Q filing to SEC, Facebook recorded a figure of $11 billion in Cash alone. A fine of $5 billion will wiped out more than half of those cash.
While that sounds like a huge reduction of cash, that number will not be fatal to Facebook as Facebook still has a strong cash generating business and a strong balance sheet.
With a fine of $5 billion, Facebook decreased by $40 billion in one day? What happened to the other $35 billion?
The Other $35 Billion
The excess $35 billion drop could present an opportunity. Curious at what is behind the huge drop, here is a 1 year stock chart of Facebook’s trade movement.
It seems like the share price drop is a technical drop, with it stopping just above the support line at $160. The next day of trading opened at $163.71 and closed at $167.50, having not breached the $160 mark.
Over-reaction or Expected Reaction?
The expected reaction is that Facebook’s market cap should decrease $5 billion due to the fine. In actual fact, it decreased $40 billion. For the efficient market theory proponents, the additional $35 billion was priced in due to the expected impact by the probe.
As if we already know exactly what the impact of the probe will be right now.
As long as the fundamentals remains, Facebook seems to be fine.
An interesting fact is, the probe would affect different tech companies, however, impacts on the different tech stocks such as Amazon, Apple, Google, Twitter and so on are different.
At these turbulent and volatile times, it is really important to differentiate noise and news.