FILE - Analysts think Facebook's fall is temporary.
CAIRO – 26 May 2018: In the wake of the Cambridge Analytica data breach that leaked the data of 30 million Facebook users, according to the political research company, 50 million, according to journalist researchers, or 87 million, according to Facebook, Facebook has taken over international news with many arguing for its sell-off. Despite scary headlines all over the news regarding Facebook CEO Mark Zuckerberg and Facebook’s stocks, the company’s business model and strong fundamentals merits a closer analysis into its stock. By looking through tens of exclusive and non-exclusive analysis by stock experts, investment bankers and chartered financial analysts, it becomes clear that calls for a sell-off are undervaluing Facebook’s global market penetration and the brand’s influence.
Sell-off…or opportunity on the doorstep
By April 10, Facebook stocks were down by more than 20 percent from their all-time high of $190.61 on February 5, 2018; the dip is an unprecedented one for the social media giant. The shares went down 16.1 percent in March and 9.4 percent in the last week of March alone. The sharp decline in Facebook’s stock value left market analysts scrambling to fix their end-of-year price target on Facebook, with many of the bigger names opting to decrease their target.
Late March, the Federal Trade Commission announced that Facebook’s data privacy practices are under a non-public investigation. In May, Europe is expected to implement the impending General Data Protection Regulation (GDPR) for data user consent. As a result, some analytical companies now fear a drawback from the use of Facebook or limitations over its data collection, which would result in less accurate adverts, meaning less revenues.
Morgan Stanley analyst Brian Nowak, cut his end-of-year price target to $200 from $230 on April 4. Despite keeping his overall rating of the stock, Nowak’s short-term view of the stock became somewhat more conservative, expecting a lower forecast of 25 percent in ad-price increase this year, according to a research paper he published.
Similarly, Merrill Lynch Internet Analyst, and Managing Director since September 2004, Justin Post, called the recent developments “significant,” leading him to reduce his 12-month price target to $210 from $230 and $265. Despite still expecting a 31 percent upside on the stock, the analyst pointed out in a research note obtained by CNBC on March 27 the grave consequences that could arise if the #DeleteFacebook campaign, which he admits has not caught on yet, persists. After the analyst’s call, Facebook shares fell 4.9 percent.
The issue with the scandal, for both analysts, is the risk it poses on Facebook’s ability to collect data to create the best advert experience for Facebook users and companies, who essentially buy into the marketing tool for its ability to precisely predict who would be interested in buying which product; basically, Facebook’s ability to outline customer behaviour. The recent developments raises “the risk of civil penalties on data privacy violations, and if history serves, could take multiple years to resolve,” Post told clients in the note obtained by CNBC. “We [Merrill Lynch] believe the key questions at hand are: was Facebook transparent in data usage, and did Facebook properly notify users of policy violations.” The answer to Post’s question, as per Zuckerberg’s statements during the congressional hearing is yes. Still, Zuckerberg does admit during his opening statement of said hearing that Facebook “didn’t take a broad enough view of our [Facebook’s] responsibility [in protecting users’ data,” a mistake he goes on to apologize for.
However, not all stock analysts predict this downfall for Facebook. JP Morgan analyst Doug Anmuth published a report in December 16, 2017 on the benefits of investing in Facebook, forecasting a $225 price target, entailing a 25 percent upside. After the influx of negative headlines, Anmuth held his ground, explaining, “Despite these negative headlines and increased concerns around user data and regulatory risk, we do not believe Facebook’s business is currently being impacted.”
Likewise, Ehab Saed, Director of the Technical Analysis Division of Osool Securities Brokerage, tells Egypt Today, “Over the past month or so, we have seen Facebook suffer great losses due to a sharp decline in its stock. This has come too quickly for there not to be a stock correction, as a result, I expect that there will be ups and downs over the next period, perhaps for the next three months.” Saed adds that the scandal is expected to have an effect on Facebook, but he sees this to be a short-term effect. Short-term gains are expected to be dismal but long-term gains are guaranteed, according to Saed.
Supporting Saed’s view, Chartered Financial Analyst Andres Cardenal argues in an investment note published on Seeking Alpha, “even if regulatory scrutiny on Facebook increases, chances are that this won’t de-rail the company from its long-term trajectory.” The pull-back from Facebook stocks and the calls by investors and advisors to sell, Cartadel suggests, should be seen as a buying opportunity for long-term investors.
Corrections in pricing are expected to keep occurring over the next few weeks, according to Saed. “We have seen the price of Facebook stocks go up over the past few days, however, this is a small-scale stock correction. Stock corrections are simply reverse movements that happen after a stock or bond has been overvalued or undervalued,” says Saed. The short-term correction is expected to last between three weeks and three months; the decline happened over a short time period and so a rebound is needed, explained Saed. Right now, analysts may be hung up and unsure about predictions, at least from a short-term viewpoint. However, as a long-term investment, Facebook shares provide a good opportunity, according to several analysts.
Saed predicts that stocks will not reach $230 by the end of the year. “Stock analysts have predicted a $230 closing for this year , I expect that it will not close at $230, that is quite high looking at the recent scandal. Still, long-term predictions are positive for Facebook, its general trajectory is up and it is stable. This means that it is not expected to fall and not get back up. In the long-run, it is stable and a good opportunity for investors; it will get better.” Saed adds that the most important metric for Facebook is the number of users and the prospects for their increase, both of which lead us to expect a continuation of Facebook’s positive trends.
No alternative to Facebook
In a sharp line of questioning, Senator Lindsey Graham asked Facebook CEO Mark Zuckerberg during his congressional hearing if Facebook has a monopoly on the kind of service it provides for its more than 2 billion users. Zuckerberg’s categorization illustrated that by dabbling its feet in two “categories,” as Zuckerberg termed them, and down-right owning the third (as a social media platform), it has largely limited competition in the field.
“If I buy a Ford and it doesn’t work well and I don’t like it, I can buy a Chevy,” Graham asked during the April 10 hearing. “If I’m upset with Facebook, what’s the equivalent product that I can go sign up for?” Zuckerberg had no reply. From Zuckerberg’s manner, body language and rare uncertainty while answering the question, it seems that the answer is that there is no alternative to Facebook, at least not for the time being.
Similarly, a number of market analysts have discussed the limited competition in the sector, indicating that this lack of competition makes it more difficult for Facebook to go under. In a paper published in April on Seeking Alpha, Catalyst Ideas explained that Facebook’s acquisition of the key social networks has “increased barriers for competition.” Through adding Instagram and WhatsApp to Facebook, “the company has future-proofed its business and concerns about lower usage among teens have been quelled,” the report explains. Right now, Zuckerberg is in control of three of the top 10 social media platforms used worldwide, Facebook landing first place, WhatsApp third, Facebook Messenger fourth place and Instagram seventh place, according to Statista’s list of most famous social network sites worldwide as of January 2018, ranked by number of active users.
This ranking has pushed many market analysts to hold the view that users will not abandon Facebook, especially given its ability to tailor to people’s needs and interests, as well as its recent branching out into e-commerce. In line with this, developed markets (D.M.) researcher Daniel Martins of D.M. Martins Research writes in his article titled Facebook: The Sky is not Falling, “a bet against Facebook is one against social media itself.” Martins suggests that despite Facebook being under scrutiny right now, the social network has an ability to reinvent and alter itself better than other social media platforms. “Despite commendable efforts from underdogs Twitter (TWTR) and Snap Inc.'s (SNAP) Snapchat, I still view Facebook, and its ‘side platforms’ Instagram and WhatsApp, as the leader in social media not only now, but also in the foreseeable future,” Martin writes.
Furthermore, despite Post arguing that the #DeleteFacebook trend’s effect is still “unclear as to how many users actually are walking away,” an exclusive research paper by social data mining firm LikeFolio argues that the #DeleteFacebook campaign is simply a flash-in-the-pan, concluding that the recent Facebook sell-out is overblown. “We see no indication that Facebook will lose any meaningful number of users or engagement from this scandal, and believe the near 20 percent sell-off in $FB [Facebook] shares is a long-term opportunity for investors,” LikeFolio concludes. Investors, like Robert Riesen, a stock researcher and investor, also seem to agree that users are unlikely to abandon Facebook.
As a social network, especially one with a business model like that of Facebook that is set on taking over online advertising by knowing how to tailor adverts according to demographics and socio-economic backgrounds, the most important metric is the number of users on Facebook. Much like Bitcoin, Facebook follows Metcalfe’s Law, stating that a network’s value is proportional to the amount of users on it. Without users, there are no connections to make up the network, no content being generated and no one to advertise to, meaning no advertising revenue. Thus, when looking at whether one should invest in Facebook right now, it is important to ask about the Monthly Active Users (MAU), which has been steadily accelerating over the past few years, according to social media analysts and Statista.
To sustain this steady acceleration of MAU, Facebook must look into expanding more in emerging markets and outside the West. In Africa, for example, Facebook has enjoyed about 42 percent growth rate for a number of years now, according to Forbes. As it stands, seven out of 10 internet users in Africa use Facebook. This has been accelerated through Facebook hot balloons and drones equipped with free internet, according to an article by MIT Technology Review’s Tom Simonite. The internet connection Facebook offers through its internet-offering devices ensures that users only access Facebook’s version of the internet, guaranteeing that new users sign up on a daily basis, according to emerge85, a research partnership between the Foreign Policy Institute at Johns Hopkins Paul H. Nitze School of Advanced International Studies (SAIS) and the UAE-based Delma Institute. Thus, it is clear that a business plan so precise, and so invested in new and innovative ideas, is set on its way and will not be affected by such a scandal. The success of Facebook’s plan is apparent, given Facebook’s profit growth averaging an 89% year-over-year increase for the past five years.
Facebook is not going under
Despite tech giants using this opportunity to throw Facebook under the bus, as Apple (AAPL) has when it alleged that its data protection practices are far more user-friendly than Facebook’s, the social media company seems to still be holding strong. Speaking at the WSJ's CEO Council in London on April 12, Carolyn Everson, Facebook’s Vice-President of global marketing solutions, says users aren't changing their privacy settings. “We have not seen wild changes in behavior with people saying ‘I’m not going to share any data with Facebook anymore.’” Everson adds that tougher regulations are not expected to result in major changed to Facebook’s overall revenue and business model, but that expenses will increase as the company hires more people to monitor abuse.
Research suggests that the number of users in North America, the region where Facebook has faced the most backlash, only represents a small fraction of the platform’s global user base. In fact, data suggest that the increase in MAU has stagnated over the past couple of years. As a result, Valentum analysis, a Global Equity Fund managed by Gesiuris Asset Management that offers investment opportunities based on value and momentum, suggests that even if users were to decrease in the US and Canada, the strong growth in Asia and other countries would offset this decrease.
Going a step further, IDC calculates that only about 46 percent of people globally have access to the internet, meaning that Facebook has much room for expansion in emerging markets. Given that this percentage increases by about four percent annually, according to IDC’s calculations, it becomes clear, as Valentum has pointed out, that MAU is set to continue experiencing strong growth. This is also likely the case if we put into account that the majority of Facebook users use smartphones and that the number of smartphone users are growing worldwide, especially since cheaper smartphones are becoming more available.
Perhaps, the question then becomes: Are adverts outside Western countries, given the strength of the US Dollar against other currencies, enough to ensure that Facebook keeps profiting? Perhaps if we only consider the currency rates, the answer will be no. However, given that there is plenty of room for growth in emerging markets, the number of people in other countries is enough to offset North America and Europe’s retreat from Facebook. This is a retreat that, as many researchers have shown, is unlikely; especially since Facebook offers a platform that is arguably unparalleled by other social media platforms.
While Facebook has a strong hold globally relative to other social media platforms, WhatsApp has a significant market presence in countries where Facebook isn’t very popular, according to a cross-country research carried out by Catalyst Ideas. Instagram is growing at about 30-40 percent year-over-year; Instagram’s revenues compromised about 26 percent of total revenue for the fourth quarter of 2017. Privacy has always been a concern for companies in the internet era, and Zuckerberg’s willingness to own up to the company’s mistakes so quickly somewhat guarantees the company’s continued success.
So, what’s the verdict?
They say, the charts know more than the numbers; with such a strong performance trajectory, this may be the case with Facebook. With a positive trend and a strong business model, strong competitive advantages, a strong performance trajectory, a healthy balance sheet and strong free cash flow generation, it is difficult to imagine that Facebook will not get back up on its feet. Anybody who followed the General Electric (GE) news would tell you to stay away from “falling knives,” however, in Facebook’s case, analysts are overwhelmingly advising investors not to wait until the dust settles and buy. After all, as Valentum points out, it is rare to find a company with Facebook’s competitive moat on sale.
Equifax, Yahoo, and many others have faced financial struggles related to data breaches. However, relative to their situation prior to their scandals, the two companies recovered well. While Equifax is still struggling, it is important to remember that Facebook’s advantages in the market surpass those of Equifax. Yahoo, on the other hand, was sold with a discount; however, this discount was related to other issues that the company had been facing.
Since its IPO in 2012, Facebook has had a great run. It gained 490 percent over the past five years. Last year, Facebook’s stock went up 9 percent, at the same time, Facebook surpassed $40 billion in revenues, $15 billion of which were net income. Revenues from adverts grew by 49 percent. In the fourth quarter of 2017, Facebook surpassed Thomas Reuters’ expected EPS of $1.95 and revenue of $12.55 billion, reaching an EPS of $2.21 and revenue of $12.97 billion. Crunching the numbers, Facebook, at least prior to the scandal, provided a watertight investment opportunity for stockholders, and, as analysts would argue, it still does after the Cambridge Analytica scandal, just not in the short term. As Riesen pointed out in his analysis of the scandal, “Facebook is undergoing a public relations crisis, not a performance crisis,” meaning that people will soon forget, especially given the lack of an alternative platform.