The cyclical nature of media companies combined with the cooling of the technology and internet sector has driven the Dow and S&P 500 down and led to a bear market. Tech’s big five lost a combined $75 billion in market value at the beginning of November 2018; shares of Facebook stock have performed considerably worse than other reputable tech stocks, including Facebook, Amazon, Netflix, and Alphabet/Google. Based on Facebook’s recent performance, advertisers, regulators, and consumers have major doubts to trust the company. Advertisers will be less likely to rely on the data they receive from the platform, and they will likely turn to other digital advertising options such as Amazon and Google.
Consumer’s growing distrust will impede them from sharing financial and personal information with the platform, inhibiting Facebook’s attempts at direct sales and damaging engagement key performance indicators. The internet itself is an opportunity and a threat to the success and operations of Facebook. Social networking dominates the amount of time users spend online; the rise of mobile and social networking has forced news media publishers to re-imagine and re-invent their business models.
For a company like Facebook, the internet is the foundational platform for the company’s existence – yet, the internet is also the tool through which a competitor could be spring-boarded. There is a high degree of rivalry given absence of barriers to deter new competition from emerging in the market. This is a vital consideration because if the value and ROI of ad spend is inefficient, or a competitor takes over market share, Facebook revenue will not manage balance costs; there is already a trend of slowing growth and market share for Facebook. The potential for this to occur is frightening for stakeholders concerned about Facebook’s results and stock, and many believe the “tech bubble” is finally about to pop.
Increased potential for regulation, surveillance, and law enforcement has grown from a climax of data misuse and mistrusting users this year. Facebook would need to outline clear investments in security to prevent future data breaches to regain the trust of users; however, continuous reports on improper fact checking and a failed focus on consumer security has turned investors and users away. The very nature of Facebook’s model has challenged its success due to user distrust in data use, security and fake accounts.
Most recently, internal emails in court filings reveal Facebook considered charging companies for continued access to user data several years ago, an action that opposes the company’s policy of not selling user information. Most people, including lawmakers, have found trouble in balancing freedom of speech with need for regulation of fake news (Figure 9). Internet regulations, such as the GDPR, may be the biggest threat to Facebook’s business. Government regulators will be of those unable to trust assurances from Facebook, increasing the likelihood of the implementation of burdensome regulations to bridle companies.
In the most recent reporting call with WhatsApp messaging, management expressed pride in the platform’s encryption without addressing the ways in which the mass-forwarding capabilities of the app contributed to the spread of fake news during Brazil’s recent election or in India. These actions certainly won’t endear Facebook to activists and governments concerned about these developments. The nature of the platform inhibits Facebook from every fully avoiding political involvement — the true test will be the method in which management chooses to improve business policies and security efforts on the matter, and what the outcome of meetings with lawmakers will look like.
In the midst of European lawmakers’ activation of GDPR privacy regulations during Facebook’s second quarter, the social media platform reported a loss of about 1 million European monthly active users and even more daily users. Although other technology and internet giants like Google say it is too early to tell how the new European regulation will affect business, most investors fear impending negative reports for Facebook in the next few months. Regulatory risk is high given the exposure of Facebook and other companies like Google and Amazon. The risks in the industry relate to a high degree of rivalry given absence of barriers to throw off new competition from emerging, high and increasing capital needs, government regulations, and consumer pushback related to data management.
Facebook has become a monopoly which leads to reasonable regulatory concern that the platform’s users should be treated fairly since in practice there is no real alternative – unfortunately similar to Microsoft’s position twenty years ago. Threat: Management One of the most recent topics of debate is the fear of the unyielding power that Mark Zuckerberg has as CEO and chairman of the board, which he does not intend to give up. Mark Zuckerberg faced a major public reckoning following the massive Facebook data breach as a cascade of crises caught up with the social media giant. Between Cambridge Analytica, Russian election interference, and the spread of disinformation, Facebook’s stakeholders have realized the extent of the business’ negative impact – and the turmoil within the greater technology and media industry.
Management’s comments on security lead investors and stakeholders to believe they do not have a handle on the operational complications the business currently faces. One solution that leadership has proposed to protect user privacy was tighter standards for custom audiences – this reaction came across disingenuous because of the magnitude of data Facebook will continue to collect on consumers, which uses to target ads without informed consent.
Facebook CEO Mark Zuckerberg’s recent aggressive style could be risky or payoff for the tumultuous business environment. Zuckerberg even faces increased pressure from investors to relinquish his position as chairman of the board. A proposal that would create an independent board chairman will be voted on at Facebook’s next shareholder meeting, but without a strong bench in position to take over management, there seems to be little light at the end of the tunnel.
Instagram’s co-founders, Kevin Systrom and Mike Krieger, resigned in late September amid turmoil on how to further monetize the branch of Facebook’s business. Sheryl Sandberg reportedly informed and concealed the full extent of Russian involvement in the 2016 U.S. presidential election. Sandberg acknowledge she and Zuckerberg were “slow” to respond to initial ideas of potential election interference. Recent hacks may only be a symptom of a larger problem, which is the company is poorly managed. Facebook may need to establish a new executive team or show better profit margins before investors can be persuaded to reinvest. Stocks pushed higher this month, but unpredictable trading from equities to bonds to oil to bitcoin has tempered expectations for the market in months to come.
Ongoing tariff battles between the U.S. and China are expected to hurt global economic growth, interest rates are falling, and the bond market believes an economic slowdown is coming. A rise in tariffs across the global stage has raised concerns from global investors that the world economy will slow down due to strict trading conditions. With a regulated macro environment and high chance of a recession in the next few years, Facebook is not teed up to climb an uphill battle. SELL Recommendation & Conclusion Currently, 24 analysts recommend Facebook stock as a strong buy, 2 recommend it as a buy, and 5 recommend it as a hold (Figure 10).
I maintain a minority opinion stance that investors should sell their shares of Facebook stock based on the threats of the competitive sector, impending regulation, a rocky macroeconomic environment, and poor management. Facebook missed guidance in the most recent quarter due to systematic problems from underinvestment in operating resources and efforts to mitigate risks caused by the platforms. While intentions may be good, Facebook has mismanaged data partners, supplied advertisers with misleading metrics, and provided a platform to users that has aided in social ills and the destabilization of societies.
I see potential for Facebook to dive below the $100-a-share mark soon with little evidence to prove a shallow bottom. Among worries of an approaching recession, the digital advertising and social media power house has faced data-protection scandals, regulation in the near future, slowing growth, and falling margins. I predict 2019 to be another year of heavy investments that will place pressure on Facebook’s ability to grow earnings per share and free cash flow going forward. Beyond decreasing numbers in advertisers and users, the company has a long list of other concerns to face.
Studies show young users are quitting the site by the million, and partisan politics are only part of the problem. With vulnerable weaknesses and only one true revenue stream, Facebook’s critical sources of loyalty are fading. I believe the company is under performing, and I see little motive to believe in the future of Facebook’s rebound.
