How Bad Will the Outage and Accusations Be for Facebook?

After years of supporting Facebook (NASDAQ:FB) in the face of critics, I finally sold FB stock in August and urged others to do so as well.

Facebook (FB) logo held by hand backdropped by company-blue background
Source: Ink Drop / Shutterstock.com

I hate to be right. But since then, the stock is down about 10%. Shares opened for trade on Oct. 5 at nearly $329 apiece. At its early September peak, FB sold for a little over $384.

This company has suffered from a perfect storm of problems. I couldn’t have predicted the Oct. 4 outage, supposedly caused by an issue with domain names. Rather, I was more concerned with recent charges that a whistleblower substantiated — that the company was prioritizing short-term profit over the health of its own medium.

But what happens now? Where are Facebook and FB stock going from here?

FB Stock and Potential Repercussions

Facebook is a network of cloud data centers and one of the world’s first free communications systems. The company and its services are ubiquitous. As journalist José Caparroso recently tweeted, “Latin America lives on WhatsApp. I am surprised by so many people underestimating how catastrophic this downfall has been.”

Billions who can’t afford other services are part of the global market only because of Facebook. While many U.S. comedians gleefully dunked on the outage, many economies across the Global South took a hit.

However, whistleblower Frances Haugen’s charges are more dangerous in my mind. That’s because Facebook’s servers are mostly based in the United States. The rest of the world is served by optical cables and third parties. That means U.S. regulation of FB’s services would potentially cover the globe.

Haugen alleged that Facebook changed its algorithms in 2018 in order to make its services more engaging, ignoring warnings that the change would also make it more dangerous.

Still, the company could survive regulation. It would provide certainty and cost money, but that would be measured in millions of dollars. Facebook had $29.1 billion in revenue during the second quarter. It saw net income of $10.4 billion. Now, analysts expect $29.5 billion in revenue for Q3 to be reported on Oct. 29.

Does that mean FB stock is a bargain to pick up amid the controversy? I’m not so sure.

Can Facebook Change?

Unlike the other big cloud players — Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — Facebook is still run by founder and CEO Mark Zuckerberg, who doesn’t turn 40 until 2024. This leadership helped fuel the company’s rise, but it could also hasten its downfall. In many ways, Facebook lacks the bureaucracy and institutional resilience of its rivals.

Zuckerberg apologized for the outage, but he has remained defiant in the face of Haugen’s claims. Facebook asked a judge to dismiss the Federal Trade Commission’s (FTC) antitrust lawsuit, demanding chair Lina Khan recuse herself.

Of the five big “Cloud Czars,” Facebook is also the least diversified. It is almost entirely dependent on ads for its cloud investment. Capital expenditures exceeded $15 billion last year and are on pace to surpass $17 billion in 2021. Zuckerberg is boosting investment in hardware and virtual reality, but so far these are like Google’s “other bets” — interesting but irrelevant to the investment case for FB stock.

Instead, former U.K. deputy prime minister Nick Clegg has taken the lead on Facebook’s defense. He blamed the U.S. itself, not Facebook, for the political polarization seen these past five years.

The Bottom Line on FB Stock

The strategy of accusing the accuser in an antitrust case is always sub-optimal. Microsoft tried that in the 1990s. As a result, it spent over a decade on the sidelines of technology leadership. Its rise was then fueled by a new generation of leaders who stepped back from controversy, accepted open source and focused on the cloud.

Facebook needs to do something similar. If it can make a deal with U.S. regulators, it can resume its growth. But it’s uncertain whether Zuckerberg is willing to do that.

If he’s not, FB stock shareholders are going to “go through some things.” That much is for sure.

On the date of publication, Dana Blankenhorn held long positions in AMZN, MSFT and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.


Article printed from InvestorPlace Media, https://investorplace.com/2021/10/how-bad-will-the-outage-and-accusations-be-for-fb-stock-facebook/.

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