Facebook will survive its latest self-inflicted wounds

Facebook (FB) is in hot water, again. It’s the same old story. Russian meddling in the 2016 presidential election.

An expose from the New York Times on Wednesday threw plenty of cold water on the idea that managers at the social media giant were oblivious. It was a monumental reporting effort.

Nonetheless, a bottom for the stock price may be near.

Since its high profile initial public offering, Facebook has been a controversial company. Critics pointed to the smugness of Mark Zuckerberg, its chief executive officer. Others railed against the negative impact of social media on community. Algorithms make it possible for extremist views to find solace with like minds.

Even worse, Zuck’s company makes money selling ads targeted at the echo chambers. Lots of money.

Following the presidential election, Facebook critics began turning up the heat. Their attacks zeroed in on lack of oversight at the Silicon Valley company. As the leading media platform in the world, Facebook had a responsibility to better police the content it published, one pointed Guardian story bellowed.

But Zuck was ready. He dusted off his best suit and went before the U.S. Congress. He told lawmakers, as a company, Facebook didn’t really know anything about the meddling efforts. Besides, with two billion users, asking the company to check every post was unrealistic.

The response made sense, especially when juxtaposed with out-of-touch senators talking about the interwebs and tubes. And it played well on the nightly newscast, exactly as intended by Facebook executives.

The problem is, according the Times reporting, most of it was false.

Following interviews with 50 sources, Times reporters allege Facebook execs knew about knew Russian meddling long in advance. They also orchestrated a compressive campaign to delay, deny and deflect reporting of the breech, even hiring an outside company to disparage its competitors, Apple and Google.

This is understandably a big story. Facebook has been stuck in a hot pot since 2016. Slowly, critics have been turning up the heat. Like the boiled frog fable, the theory is Zuck and his executive team, are about to drown in their own complacency.

It could happen. I have been critical of Facebook because I believe executives took the wrong approach from the onset. They built a wonderful business, with surging revenues, solid membership growth outside the U.S., and brand identity. For many people, Facebook is the internet.

In 2017, eMarketer, a digital ad research company, found that combined Facebook and Google properties captured 63% of total digital ad spend. The duopoly captured all of the growth in digital advertising, a sector that exceeded television ad spend for the first time ever.

Digital advertising is the future of the industry and Facebook is growing fast by helping advertisers find coveted demographics better than any other resource.

Its business is targeted ads. It is good at this because it knows so much about its fervent user base. Most important, Facebook users know they are being targeted for ads. They are not being duped, and company executives should stop kowtowing to critics claiming otherwise.

The bullish case for Facebook rests on price action. While the shares did not participate in the big technology rally Thursday, they also did not decline. In many cases, this is how durable stock price bottoms occur.

I’m not saying Facebook shares have bottomed. It is still too early to know if that is true. However, when stocks do not decline in the face of bad news it’s an indication that buyers with strong hands are stepping up. This is a good sign.

There is a bearish case for Facebook. It portends government regulation, mandatory stricter privacy guidelines, and new taxes.

The stock trades at 19x forward earnings, for a market capitalization of $421 billion. Sales growth during the last 4 years has averaged 51.2%. In fiscal 2017, the company grew revenues by 47%, to $40.6 billion.

My guess is that rumors of the death of Facebook are exaggerated. The politicians may say that they hate it, but they need it for their campaign advertising as much or more than any other industry. Never forget that a politician’s main job is getting reelected. They may squawk, but they won’t kill the golden goose.

Best,
Jon D. Markman

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