Does Facebook, Inc. (NASDAQ:FB) have trouble?
Roger McNamee thinks so. The early Facebook investor, venture capitalist and part-time rock-and-roll star posted a long article at The Washington Monthly warning that Facebook indeed has a problem with its product, which isolates people and makes them easy to manipulate. Democracy is at risk, he warned.
It reminds me of the first Broadway show I ever saw, The Music Man. Professor Harold Hill claims the people of River City have “trouble” from a pool hall. It’s a con to sell them band instruments and uniforms. The city’s only trouble is a lack of imagination, which Hill fills. Cue the happy ending.
Can Facebook possibly have trouble while expecting to earn $1.94 per share in one quarter, on revenues of $12.48 billion? Compared with $1.43 per share of earnings on revenues of $8.809 billion a year earlier?
Yes, it can.
It’s not because McNamee is inviting governments around the world to go after Facebook for how it handles user data and sorts people into tribes, turning interests into obsessions and disagreement into cyber war.
It’s because Facebook seems to be reaching its growth limit. With 2 billion people now using its service, and China closed off to it, Facebook needs to create new services to grow. Instagram can kill Snap Inc (NYSE:SNAP), but that won’t solve the problem.
If Facebook can’t grow its consumer businesses, it can’t fill new data centers, on which it spent $7 billion last year. It doesn’t resell cloud capacity, like Amazon.com, Inc. (NASDAQ:AMZN). It doesn’t enable others’ software efforts, like Microsoft Corporation (NASDAQ:MSFT), and it doesn’t resell apps, like Apple Inc. (NASDAQ:AAPL).
What’s a cloud czar to do without services to fill its servers? That’s Facebook’s problem.
The company seems to recognize this, tweaking its algorithm to take out news and protect friends from unsavory opinions. Journalists worry they’re being cut out of the “meaningful conversations” this is meant to foster, and a share of Facebook’s ad revenue as well.
Call to Conscience
McNamee has been a Silicon Valley Buddha for years and has reached the arc of that story where sitting under a tree, meditating to music and thinking seriously about the soul makes sense.
Facebook is addictive, and bad actors are using that to poison minds, McNamee writes.
He wants bots banned. He wants Facebook prohibited from buying anything until it fixes its product. McNamee wants political manipulation on the platform outed and ended. He wants the company’s algorithms, which give people more of what they want, explained. He wants users to have control of their data, a limit on how that data is exploited, and the anti-trust cops brought in.
The problem for McNamee, and for all Facebook bears, is that the company has gone in a decade from feisty upstart to pillar of the establishment. Facebook spent $8.4 million on lobbying last year, and its Political Action Committee is giving more to Republicans than Democrats this cycle. Asking politicians to reject big contributors is tough in any context.
Taking the actions McNamee suggests would sink Facebook stock. Instead of being in the position of a Buddha or musical comedy character, he is Dr. Frankenstein, warning the village of the monster he created. Sadly, in this version of the story, the monster is now the mayor, with the power to turn the mob on him.
Politically, Facebook is in a defensive crouch, facing calls from Europe to hunt down “hate speech,” sniffing that it is “above partisanship,” while bragging that it does indeed raise politicians up and knock others down.
Bottom Line on Facebook Stock
Only seven of 45 analysts following Facebook stock call it anything but a buy, the market cap is at $545 billion after growing over 50% last year, and all seems right in Facebook’s world.
That’s what worries me. It’s when everyone is screaming “buy” that the tiny voice in my head says “sell,” and I’ve sold Facebook stock. I’ll watch this play out from the sidelines, thank you.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in MSFT and AMZN.