Don’t be fooled by Facebook Inc.’s ‘bargain’ price
The platform’s failure to protect users is just one reason why its valuation is dropping
Facebook Inc.’s days as a carefree profit maximizer are numbered, and so is its inflated stock price.
Even at its knocked-down share price of $185.18, Facebook stock is not the bargain many investors believe it to be. (All figures in U.S. dollars.)
True, Facebook’s user base of 1.4 billion accounts for close to one-sixth of humanity. The company’s profits have continued to grow. And having shed $147 billion worth of shareholder value on July 25, or more than 19 per cent, the temptation is to buy the stock on a dip.
Yet even at its current, lower price, stock in the 14-year-old social-media juggernaut remains overpriced, and Facebook’s total valuation, of $535 billion, looks unsustainable.
Facebook faces daunting challenges for which it is not prepared. So does the entire social-media industry. Consider the sloth of Facebook and certain of its peers in waiting until this week to boot Alex Jones, the notorious peddler of incendiary falsehoods, off their platforms. And Jones, a hatespewing creation of the social-media giants, whose platforms lifted him from obscurity, has not had his account revoked by Twitter Inc.
The Jones episode is more evidence of the social-media industry’s inability to police itself. Even Mark Zuckerberg, co-founder and CEO of Facebook, believes regulation of his industry is inevitable.
The industry must therefore brace for the same state regulation with which traditional media comply — including the libel, hate-speech, anti-defamation and anti-monopoly laws. And that will undermine the industry’s current, lucrative Wild West business model.
Facebook’s business model is to collect ever-increasing amounts of personal data from an ever-larger population of users — including the dangerous kooks to whom it provides a platform. It then “rents” those users to advertisers, who exploit the user data Facebook provides them to precisely target their messages.
Facebook is an advertisingrevenue business. It is only incidentally an exchange for baby photos and recipes.
And the social networks have turned anti-social, especially, given its size, Facebook.
In March, it was revealed that the exhaustive data Facebook has accumulated about its users was compromised to manipulate the outcome of the 2016 Brexit referendum and the U.S. presidential election.
But exuberant investors kept the faith. Prior to the July 25 stock drop, they had boosted the price of Facebook stock more than 40 per cent since the revelations of 2016. That was also the year of the tragic live-streamed death of Antonio Perkins, who used Facebook Live to broadcast his suicide.
It is untenable that Facebook continue to allow itself to be used to meddle in the affairs of countries and to provide a global stage for the behaviour of deeply troubled people and groups.
Yet Facebook stock is still “priced to perfection,” even after its abrupt fall from its peak value of $217.50 per share July 25. To justify its inflated, albeit diminished, stock-market valuation, Facebook must execute perfectly on each of its growth goals. But that’s unlikely to happen, given the enormity of negatives facing social media.
Facebook’s current price assumes that the unregulated social-networking industry will retain that status. It will not. Facebook already has to cope with strict privacy protections imposed by Europe this year. The U.S. will follow suit. And both jurisdictions are also investigating suspected antitrust practices at socialnetworking firms.
Compliance with regulations newly imposed on them will cut into profit growth at social media firms by curbing user and advertising growth rates.
Facebook has effectively saturated the North American and European markets that account for 72 per cent of its revenues. In those core markets, user growth is slowing, and time spent on the network is slipping. Privacy concerns account for some of that falloff, and they are growing. Yet continual double-digit growth in both metrics is built into the current Facebook share price.
Unilever PLC, the giant consumer products firm (Dove soap, Sunlight cleansers, Ben & Jerry’s ice cream), is among the companies that have begun threatening to pull their ads from Facebook.
“We cannot have an environment where our consumers don’t trust what they see online,” said Unilever’s chief marketing officer Keith Weed.
Unilever accuses Facebook of failing to protect its users from extremist and illegal content.
Obliging advertisers who increasingly worry about their reputations, as social-media firms must do, will curb the user growth that drives adrevenue growth. Again, the business model is to host as many users as possible, not evict existing ones or turn away disreputable prospective ones. But that model is a public-health hazard.
And as long as Facebook fails to clean up its act, it’s doubtful that the likes of Loblaws, Tim Hortons and the Anglican Church of Canada will continue seeking to be “liked” on Facebook.
A Facebook whose content foments dissent in the West cannot hope to expand more widely in repressive markets like China, a source of growth also factored into Facebook’s current lofty share price.
Facebook will also struggle in trying to launch new products.
This week, Facebook said it will try, with users’ permission, to obtain their personal financial data from their banks in order to sell financial-trans- action services to them.
But with Facebook users now “unfriending” the network on privacy concerns, how likely is it that remaining users will trust Facebook with even more personal data?
“Facebook is the least trustworthy online company,” U.S. investment manager Om Malik of True Ventures told Bloomberg Television this week. Malik, an erstwhile Facebook investor, says Facebook needs to be regulated, citing a litany of broken Facebook promises to protect its users.
Facebook has long known that it is a cesspool of cyberbullies, fomenters of ethnic violence, and Vladimir Putin operatives looking for new ways to disrupt the Western alliance, as they have done with Brexit and the installation of Donald Trump.
“The ugly truth is that we believe in connecting people so deeply that anything that allows us to connect more people more often is de facto good,” Andrew Bosworth, a Facebook vice-president, said in a 2016 leaked memo.
“Maybe it costs a life by exposing someone to bullies. Maybe someone dies in a terrorist attack co-ordinated on our tools. And still we connect people.”
Facebook finally committed this year to purging at least some questionable content from its network. But Facebook’s ultra-sophisticated algorithms continue to connect malevolent people to each other with an efficiency unprecedented in history.
It must be granted that Facebook is a significant part of the culture. But like the regulated investor-owned utilities whose ranks Facebook is destined to join, Facebook will no longer command a sky-high market valuation. It will become an income stock rather than a go-go investment.
There are worse things than being an income rather than a growth stock. Except for investors who mistake one for the other.