Despite facing the prospect of greater oversight by regulators around the world, Facebook remains a compelling long-term investment, according to Blue Whale Capital founder Stephen Yiu. 
The issue of increased regulation targeting data use has been raised after the social media giant was embroiled in scandals earlier this year.
Chief executive Mark Zuckerberg appeared before the US Senate and the European Parliament to defend the company as questions were raised about the data held by Facebook and how it is shared with third parties.
Performance of stock YTD in USD
Source: Facebook
While Facebook's share price was impacted, it has recovered from the losses suffered earlier in the year. However, the long-term prospects for the company have been thrown into question as politicians moot greater regulatory oversight of the social media giant.
Yiu, co-manager of the LF Blue Whale Growth fund, aims to identify businesses that are fundamentally attractive and as such must not face structural or imminent cyclical issues. He argued that Zuckerberg’s Facebook falls into this definition perfectly.
Indeed, the Blue Whale manager said that more regulation could help the social media giant to consolidate its position.
He highlighted the banking industry as an example of where regulation had succeeded in stifling the number of new entrants. The oil & gas industry is another, as there is a lack of serious challengers to sector giants BP and Royal Dutch Shell.
“What’s going to happen with Facebook and the social media industry is that you are going to have a lot of regulation, which increases costs,” he said. “But it’s going to exclude a lot of new players. The biggest threat to Facebook is not regulation: it is the new entrants.”
As such, the Blue Whale manager (pictured) said there is still significant potential upside for the social media giant. 
“Facebook has about two billion users globally, all the money that it makes [comes] from Facebook. But it [also] has Instagram and WhatsApp,” he said.
Photo and video-sharing social network Instagram has around 800 million users while online messaging service WhatsApp has around 1.2 billion users globally, underlining the earnings potential for the two subsidiaries.
“As far as Facebook is concerned, they have only very recently started to monetise WhatsApp and Instagram,” said Yiu, noting that they currently contribute less than 5 per cent of revenue.
Additionally, if Facebook were to spin-off WhatsApp or Instagram they would be able to command high valuations for what are extremely popular brands and services.
“How much you value WhatsApp with 1.3 billion users all over the world? I would argue that if they were forced to spin it off, that would be good news,” he said.
“WhatsApp is worth $50-100bn, at least, as a standalone company. Instagram is worth another $50-100bn. Facebook is worth only $500bn company, breaking it up is good for shareholders.”
If the two were to be sold, the manager believes there could be a 30 per cent uplift for the Facebook share price.
Another benefit for the US technology giant, said Yiu, is the changing nature of the advertising industry as more firms begin to move their spend online, away from traditional media.
Internet activities by age group in 2017
Source: Office for National Statistics
The manager noted that despite the scandal earlier in the year and despite concerns over the use of data, users continue to share online, as the above chart from the UK Office for National Statistics (ONS) demonstrates. The findings from an ONS report on internet usage in the UK revealed that the use of internet for social networking rose from 45 per cent in 2011, to 66 per cent in 2017.
“The generation has changed now,” he said. “People don’t really care [about sharing online] they’ve become much more open now compare to older generations.”
Following the strong rise in market valuations last year driven by the FAANGs – Facebook, Amazon, Apple, Netflix and Google owner Alphabet – concerns have been raised over whether the social media platform is now too expensive.
However, the Blue Whale manager said that it remained an attractive proposition from an earnings perspective.
He said Facebook was currently trading at around 20x earnings with earnings growing at around 20-25 per cent per year and sitting on $54bn cash – around 10 per cent of its market capitalisation.
Yiu added: “The only risk to Facebook is whether the next generation the zero-10 year-olds still use it in 10 or 20 years’ time.
“As far as Facebook is concerned we don’t see any structural issues, there are no cyclical issues. The only issue is that it needs to invest more money.”
The stock is one of the high conviction picks within the newly-launched LF Blue Whale Growth fund’s concentrated portfolio of 25-35 stocks. As Yiu noted previously, each holding needs to deliver at least 5 per cent returns per year to be included in the portfolio.
Other top-10 holdings within the fund currently include tech giants Adobe, Alphabet and Microsoft. They also include payment services such as Mastercard and Paypal, and animal health company Zoetis.
Since launch LF Blue Whale Growth has delivered a total return of 14.87 per cent compared with a gain of 7.42 per cent for the benchmark MSCI World index and a return of 7.14 per cent for its average IA Global peer.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
LF Blue Whale Growth has an ongoing charges figure (OCF) of 1.17 per cent.