This year investors have been anti-social; specifically, they have been dumping social networking stocks. Facebook (NASDAQ:FB) has fallen 6.8% in 2018 and Snap (NYSE:SNAP) has tumbled a grueling 42%. Twitter (NYSE:TWTR) has been able to buck the trend, with a gain of 18.5%, but the shares have plunged 41% since July. So could there be bargains in the social space? Perhaps. But when it comes to bottom fishing, a good approach is to focus on the high-quality operators. And FB stock certainly belongs in the latter category.
FB has several major advantages:
- It has a massive user base, with 1.47 billion daily active users and 2.23 billion monthly active users.
- FB stock has a market cap of $475 billion and FB has $42 billion in the bank. In other words, the company has the resources to engage in transformative acquisitions.
- The company has a global ad infrastructure, with millions of advertisers.
- WhatsApp and Instagram continue to show strong user growth. Note that WhatsApp has 1.5 billion users and Instagram has 1 billion users.
That all sounds great, right? Definitely. But when it comes to FB stock, I still think that investors should exercise some caution. If anything, the decline in Facebook stock may not have been large enough to reflect the issues it’s facing. Those issues are:
Privacy And FB Stock
Trust is critical for a social network. Users want to make sure that their personal information is well-protected.
But unfortunately, FB has not met that standard. Earlier this year, the company acknowledged that Cambridge Analytica mishandled the data of as many as 87 million FB users. As a result, Facebook CEO Mark Zuckerberg had to testify before Congress.
Last week, Facebook announced that close to 50 million of its accounts had been hacked. The EU may enforce its newly enacted GDPR laws and hit FB with a fine as high as $1.63 billion in the wake of the breach.
But FB’s real problem is probably users’ reduced confidence in the Facebook platform. According to Evercore ISI Securities analyst Anthony DiClemente, about 10% of the affected users may ultimately not return to Facebook. If that occurs, FB could lose $200 million of ad revenue.
Growth And FB Stock
The most recent earnings report from Facebook was definitely jarring. It showed that the company’s growth is stalling, especially in the US, Canada and Europe. It appears that the company’s recent privacy issues have taken a toll.
And it looks like the growth issues are not temporary. On the earnings call, Facebook CFO David Wehner pointed out that the company’s sequential revenue growth is expected to fall to the high single-digit percentage levels in the second half of 2018.
Meanwhile, Facebook’s costs are likely to increase. After all, the company has been investing aggressively in its efforts to vanquish fake news and increase security.
Bottom Line on Facebook Stock
Growing consumer apps is no easy feat, as the market is fiercely competitive. That is why leadership is so critical.
However, in the case of Facebook, there are some worrisome signs. Last year, the founders of its subsidiary, WhatsApp, left. Then last week the founders of Instagram announced that they would leave. For the most part, it appears that these employees decided to depart due to disagreements with Zuckerberg.
But whatever the cause of the departures, FB’s operations are likely to be undermined by them. As a result, its growth could be pressured further, hurting FB stock. Besides, the timing of the departures is not great, in light of all the issues that FB is tackling. So given all of the headwinds facing Facebook stock, it’s probably better to wait until things become clearer before buying FB stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
