It seems 2018 won’t be a year of smooth sailing for Facebook (NASDAQ:FB) investors. At least not so far.
Along with the ongoing flow of negative news about its platform, from a share price perspective, this social media giant looks like an underdog when compared to other top technology stocks. While Facebook stock has barely budged this year, Netflix (NASDAQ:NFLX) surged 38%, Snap (NYSE:SNAP) is up 36% and Twitter (NYSE:TWTR) jumped 34%.
This comparison suggests that Facebook’s weakness has little to do with the increasing volatility in markets. Rather, it’s likely something deeper that's keeping investors on the sidelines.
The latest dip in its stock price, which closed at $177.36 on Friday, down 1.44%, came after the office of U.S. Special Counsel Robert Mueller charged 13 Russians and three Russian companies with meddling in the U.S. 2016 Presidential elections. The indictment said Russians adopted false online personas across a variety of popular social media platforms to push divisive messages and further the campaign of then Republican candidate Donald Trump.
Facebook and other social media companies are under growing scrutiny by regulators and politicians on concerns that online platforms are being used by U.S. adversaries and criminals. Congress, for example, has been examining how Russians used social media platforms to influence the 2016 election.
Even before the recent indictments, some lawmakers have criticized Facebook for not refusing election ads purchased in Russian rubles. Bipartisan bills have been introduced in both the House and Senate that would require companies like Facebook to become more transparent about advertisers on their platforms.
No wonder investors have become cautious about Facebook's prospects. Some are wondering if this underperformance is a sign that Facebook’s fortunes have reversed. This was, after all, a company whose stock price, since its IPO in 2012, had surged more than three-fold.
Despite this negative momentum, however, I believe Facebook’s long-term value remains intact. Nor do I think it's a prudent strategy for long-term investors to exit this trade in a hurry. Here's why.
Recent company activity indicates that Facebook has a credible plan to address the challenges stemming from the alleged use of its network by criminals and rogue foreign regimes. It’s dealing head on with the issues of fake news and the spread of sensationalism, in order to minimize the risk of future government intervention.
Last month, Facebook announced it was changing the way it lets users consume news. The move is intended to boost social interactions over stories from publishers. In other words, going forward, Facebook intends to help users have "more meaningful social interactions" instead of finding "relevant content.”
Facebook’s dependence on algorithms has been one of its weak spots when it comes to identifying content which is illegal or criminal in nature. For example, the ads which were allegedly purchased by Russian actors on Facebook during the US election season went through the company's automated ad buying system without any human scrutiny.
Since then, however, the company has bolstered the team that reviews ads and is planning to add tools which would allow users to know who purchased and/or sponsored them. The company plans to double the number of people who will monitor content, removing hate speech and fake news. Furthermore, there will be higher standards on the disclosures and targeting of ads.
The fundamental strength of Facebook's business is that it is an incredible money-making machine. And I doubt Mark Zuckerberg is running out of options with which to keep that machine churning out cash.
It's clear that the changes Facebook has been introducing to make its platform more socially responsible are reducing the time people spend on its network. At the end of last year, Facebook noted that users cut back their time on the platform by 50 million hours a day.
But FB has a strategy for making up this shortfall via its additional diversified properties. For, example, its Instagram platform—which targets a younger audience—now has 800 million users. Indeed, about 59% of this audience is in the U.S. and are under the age 30.
As well, Facebook has its powerful WhatsApp messaging service, in use right now by more than 1 billion people in over 180 countries. The company hasn’t even started to monetize it.
Then there's Facebook Watch, a video-on-demand service the company introduced this past summer. Watch, which could also be aimed at Google's (NASDAQ:GOOGL) YouTube, will be yet another of the ways the company can expand beyond digital ad spending and begin to capture TV ad dollars.
Bottom Line: Facebook shares might continue to lag during the first-half of this year, a result of the drastic transformation the company's business is going through.That’s nothing unusual, though, for companies operating in the tech space. The most promising thing about Facebook is that its platform is so powerful, advertisers can’t afford to ignore it.
As long as the company continues to generate market-beating earnings and substantial cash flows, any dip in the stock is a great buying opportunity.
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