Facebook (NASDAQ:FB) has been able to escape a lot of issues for a very long time, simply because of its massive base. The social media giant has great technology to be sure. And for the size of it, FB stock has spent plenty of time, money and energy making sure the platform is secure.
Facebook’s issues at this point are more internal than external, and the markets don’t like uncertainty. There are significant privacy concerns, and while those don’t really move the needle in the U.S., they do in Europe and other countries.
After building a model that is generating significant revenue, these kinds of issues can be crippling.
Remember that when FB stock went public, there was a huge amount of excitement for all the possibilities of turning this free social media service into a massive business. Investors were looking at the potential of having — at current count — 1.5 billion daily active users and 2.2 billion monthly active users.
And while GOOGL was just working with email and other features, FB had a platform that engaged people on a regular basis for relatively long periods of time.
Remember, while having a lot of visitors is a great thing for a site, the real metric you want to see is growing amounts of time spent on a site. When you have dedicated eyeballs, advertising and messaging have much more potential.
And in the early days of FB stock, big advertisers flocked to Facebook thinking it would be raining money. But the platform and its users weren’t interested in the ads and the ads weren’t always right for the platform. The advertisers pulled out and the stock fell.
But after a couple years, Facebook and advertisers figured it out. The company loosened some of its ad rules and privacy policies and advertisers refined their messaging and branding for the new medium.
It was those changes to the privacy policies that have become the issue today. The amount of information that Facebook has compiled and is now slicing and dicing and selling off or using in its own interests is becoming an issue.
Where FB Stock Goes Now
The real challenge now for FB stock is whether it can reform enough to keep the U.S. and EU happy but at the same time generate enough value from its users to keep revenue growing.
There are also a growing credibility issue and demographic challenge with Facebook moving forward.
Regarding credibility, Facebook leadership has said numerous times it wasn’t doing anything wrong — and then it was caught doing exactly that. When you’re testifying before Congress and lying to Senators, it doesn’t make life easier.
As for the demographic issue, Facebook isn’t the hip app for youngsters it used to be. Instagram and WhatsApp are really the ones that are continuing the growth for FB stock.
But there are plenty of competitors and if FB ends up getting hit by regulators and some of its less savory business practices are exposed, you could see a quick shift in users preferences.
That’s why my Portfolio Grader has FB currently at a D rating. There’s too much risk to step in right now and if you’re holding it, there may be more downside left.
Louis Navellier is a renowned growth investor. He is the editor of four investing newsletters: Growth Investor, Breakthrough Stocks, Accelerated Profits and Platinum Growth. His most popular service, Growth Investor, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.