Do Facebook’s recent troubles present a buying opportunity?

Do Facebook’s recent troubles present a buying opportunity?

Originally written for CMC Markets via The Crown & Co.

This piece is a typical example of an Update: a short-form piece that informs investors on the likely impact of high-profile news stories on a company’s share price. During a year writing for Opto, I wrote 88 Updates, most of them following a similar overall structure.

The original post is linked above. The original disclaimers have been retained in the reproduction below.

The Facebook [FB] share price was rocked twice over on 4 October after a whistle-blower accused the company of prioritising profit over hate speech and a major outage crippled services, including WhatsApp and Instagram for six hours. Competitors like Twitter jumped on the bandwagon to capitalise on the empty spot.

The Facebook share price closed Monday 4 October 5.1% down from its previous close on Friday 2 October, although its low point for the day saw it nearly 6% down. The stock’s resilience left investors wondering if this made for a good buying opportunity.

A former Facebook employee, Frances Haugen (pictured above), testified to congress about policies and business practices she claimed made the company “morally bankrupt”. The tech major initially blamed the outage on a system update and issued clarifications that no data had been breached. Since then, it appears things have gone back to normal for the social media major.

Facebook shares beat the Global X Social Media ETF [SOCL], of which, as of 10 October, Facebook is the top holding, with 12.09% of net assets.

Resilience versus regulation

Despite reports that the outage, reportedly caused by employee error, was so severe that Facebook’s technicians couldn’t access the office in order to address the problem, and having the company’s business model demonised by a former insider, the Facebook share price was down less than 4% for the week ending 8 October.

This resilience may not hold if it leads to increased regulation. Facebook’s opponents are out to ensure that is the case.

MEPs in the EU are already calling for new rules to prevent business models that favour “disinformation and violence over factual content”, while, across the Atlantic, White House press secretary Jen Psaki told reporters that the US government feels the leaks were “the latest in a series of revelations” that show social media platforms’ attempts at self-regulation are “not working”.

Meanwhile, US Representative Alexandria Ocasio-Cortez was among those who claimed that the collateral damage resulting from the outage was proof that the company effectively wields a monopoly over global communication services. Anti-monopolistic sentiment has been fuelled by the latest developments.

Perhaps, though, the outsize impact of the outage is part of the appeal to investors. If Facebook can avoid any serious regulatory consequences from the week’s events, the company will appear to be in a position of great strength.

“Buy the selloff”

Observing that a stream of negative news stories had brought the Facebook share price down 13% from recent highs, JPMorgan analyst Doug Anmuth recently reiterated a third-quarter revenue estimate of $29.5bn and recommended investors buy the stock amid the pullback. He reiterated an overweight rating and $450 price target, according to The Fly, while pointing out that Facebook has weathered negative news storms in the past and has itself called for greater regulation.

However, on 5 October, DZ Bank analyst Ingo Wermann set a $350 Facebook share price target and downgraded the stock from buy to hold.

For now, many analysts remain positive about Facebook — unsurprisingly, given its dominant status in a social media industry which, according to a recent report from Research and Markets, could grow at a compounded annual rate of 25.38% to just shy of $1trn by 2026.

Out of 51 analysts polled by CNN Money, 34 held ‘buy’ recommendations for Facebook, with five rating it ‘outperform’ and 11 hold. Just one analyst polled gave a ‘sell’ rating.

Provided none of the week’s events prompt major turbulence to Facebook’s business model, the stock looks set to rise in future.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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