Facebook shares still pressured by negative newsfeed
Facebook shares are struggling to participate in the global equity market bounce as an onslaught of negative news continues.
The shares staged a small bounce at the end of trading on Monday, but reports on Tuesday that CEO Mark Zuckerberg had declined to appear before UK lawmakers look set to weigh on the stock anew. The televised appearance at a UK Parliamentary Committee of a whistleblower who alerted the media to alleged misuse of personal data by Cambridge Analytica has generated fresh headlines and allegations. These threaten to eclipse attempts by Facebook to draw a line under the affair.
$100bn up in smoke
The stock’s loss since 16th March approached 20% by Monday, equating to the destruction of around $100bn in market value as more regulators began investigating the network. These included the U.S. Federal Trade Commission, which has the power to fine Facebook on a daily, per-user basis, suggesting a possible multibillion dollar penalty.
Public outrage has thereby damaged Facebook shares by impacting sentiment, but a financial impact can’t be ruled out. An increasing number of advertisers have announced they are suspending campaigns on the company’s platform whilst seeking clarification of data policies. Aside from Commerzbank, Germany’s second largest lender, most of these advertisers are relatively small. But if the public outcry runs further, further big names could pull ads as they have threatened to, denting the stock more.
Revenues in focus
This helps explain why Facebook’s stock continues to struggle, whilst other high-multiple technology shares that could also bear the brunt of any new privacy regulations, rebound. Investors are also reacting to signs that Facebook users no longer trust it to safeguard personal data, according to surveys. These polls do not reveal much that is new. But the rate at which scepticism is rising suggests the scandal could exacerbate already slowing user trends. Facebook users spent slightly less time on the app on average in the fourth quarter whilst growth in developed markets plateaued. Advertisers that spent around $40bn on Facebook last year may not hesitate to look elsewhere if the trickle of users deleting Facebook becomes a flood. The first signs of a hit to ad revenue may come in Q1 results scheduled on 1st May.
Still, investment interest is unlikely to decline sharply over the long term, in part due to the multiple revenue streams Facebook has yet to monetise. For instance, it will only begin experimenting with paid subscriptions on 315 million-user WhatsApp this year. Revenues of say, $1bn—a fifth the size of some Wall St estimates—taxed and capitalised harshly at 20% and 3.5% respectively could warrant a valuation just short of $10bn. Such calculations would be in order for Instagram, Messenger, and Oculus when Facebook begins publishing their figures. To be sure, it will take years before the quartet can replace any ad revenue loss, but even if their own users shrink in the medium term, investors won’t stray too far.
More to do
Before then, senior Facebook executives have much more work to do to reassure users that unauthorised data access cannot happen again. Investors may even be signalling their view that CEO Mark Zuckerberg and COO Sheryl Sandberg have reached the limit of their ability to lead the complex beast that is Facebook. We see little chance of major C-suite changes in the near term though. So the sooner they crack on with convincing assurances, the sooner the shares will find a sustainable floor.