Facebook chaos: should you still be invested?
Scandal-hit Facebook has lost 11pc of its market value in a month, leaving some professional investors who had previously backed the stock wavering in their support. The social media giant has been embroiled in controversy since it was revealed that 87 million people had their personal data harvested by political consulting firm Cambridge Analytica without their knowledge.
Facebook applications, such as quizzes and games, were able to harvest data from all of a user’s friends’ profiles, even if the friends themselves had not used the app.
This has sparked an investigation by American regulators, and chief executive Mark Zuckerberg this week testified before Congress.
A large number of investors will, whether they know it or not, be exposed to Facebook. This could be through directly holding the share, or holding it via a fund that is invested.
According to data from research firm FE Analytics, 33 out of 296 global funds have Facebook as a top 10 holding, as do 38 out of 138 funds in the North America sector.
Many fund managers still back the stock to succeed. Terry Smith, who runs the £12bn Fundsmith Equity fund, recently added Facebook as a new top 10 holding in his fund.
So, should those who own the stock be selling? Telegraph Money spoke to top fund managers with opposing views.
The social network’s future is dividing investors, reports James Connington
Facebook used to be a top 10 holding of James Thomson’s £1.2bn Rathbone Global Opportunities fund. The fund has delivered a 493pc return, compared with 280pc for the FTSE World index, during Mr Thomson’s 15 years in charge.
He first bought Facebook shares in 2013, but sold the entire holding a few weeks ago – the largest ever sale in the fund’s history.
Mr Thomson said: “We feel the bombardment of advertising and exploitation of personal data are polluting the appeal of Facebook. In its pursuit of profit, Facebook is losing its consumer trust.”
He explained that there are two main potential triggers that could lead the stock “to crater”.
The first is customer fatigue; the recent controversy could cause users to spend less time on the social media service and engage less, hurting earnings.
The second is advertisers starting to question the integrity of Facebook’s advertising reporting data.
A more fundamental problem, however, is that Facebook “can’t rebuild trust with users and protect profits for shareholders at the same time”, according to Mr Thomson. In other words, the changes that may need to be made to its service to regain user trust could hurt earnings.
“We could be wrong – optimists say Instagram, which Facebook owns, will pick up the slack, but it makes less money per user than Facebook,” he said.
Mr Thomson doesn’t believe that Mr Zuckerberg’s recent testimony before Congress will do much to calm the pressure on the firm, “given his responses so far have come across as robotic, repetitive, and unsympathetic”.
He added: “The real fireworks could be in two weeks, when Facebook reports its quarterly results. If social media companies push too hard on advertising, or making money out of their users, they get turned off.”
Axa Framlington Global Technology has delivered a 398pc return over the past 10 years, compared with 310pc for the MSCI World Information Technology index, which consists of 170 technology companies spread across 23 developed markets.
Manager Jeremy Gleeson has been in charge since 2007, and has more than 7pc of the fund invested in Facebook shares.
His view is that although the past few weeks “have been difficult” for Facebook, “the medium term trends supporting the investment case for Facebook remain intact”.
He added: “The recent share price fall has been driven by the anticipation of a risk that negative headlines may result in large numbers of users closing their accounts. We think this is unlikely, and back the management team to resolve the issue.”
Mr Gleeson explained that Facebook has taken action against Cambridge Analytica, is investigating further, and that Mr Zuckerberg’s testimony should provide greater understanding of how the firm will prevent similar problems in the future.
“We don’t think advertisers will make dramatic changes for the moment, as there are not many efficient alternatives that combine a personalised solution and a huge user base,” Mr Gleeson said.
He added: “The recent issue may overhang the company for a couple of quarters until we see what sort of impact (if any) it is having on its financial results. If the company is fined, we believe Facebook has enough cash to withstand the hit.”
Unlike many commentators, he does not believe technology stocks are in a bubble.
“Technology stocks have performed well, but this has been supported by strong earnings and cash flow growth,” he said.
Nick Evans, manager of Polar Capital’s £1.5bn Global Technology fund, also continues to back the stock – it is one of the fund’s largest holdings.
He explained that the market is prone to being overly negative about the prospect that something significant may derail the ability of technology giants such as Facebook and Google to monetise internet traffic.
“That said, we have not added to Facebook in the recent slump, although we would not hold the stock at all if we did not expect the company to deliver robust earnings and cash flow growth,” he said.
He sold the entire Facebook holding – the largest ever sale in the fund’s history