The Cambridge Analytica scandal that rocked Facebook (FB) back in March raised some big questions about the firm. For investors, of course, the pertinent one was whether the social media behemoth’s winning run of share price gains has run its course.
Facebook’s share price, which had gains 53% in 2017 alone, reached a new record high of $195 at the beginning of February. Just eight weeks later, it had sunk to a nine-month low of $151.
For the most part, the data scandal was to blame for that. Facebook shed almost $100 billion of market cap in the space of just four days. The platform itself, along with competitors, became awash with a #deletefacebook and many were wondering whether it could recover.
But some investors had become cautious before this particular episode broke. In the fourth quarter of 2017, we saw the first signs of slowing user engagement.
This was the main reason James Thomson, manager of the Morningstar Silver Rated Rathbone Global Opportunities fund, sold his entire Facebook holding on the day the Cambridge Analytica story broke. “It wasn’t because of that… but it tipped me over the edge,” he says.
The main concern for Thomson was a “fear was that the news feed has become increasingly polluted with advertising”, and also “the creepy relevance” of the ads, which have become much more targeted.
He feared that this could accelerate the slowing of the engagement rate as well as time spent on core Facebook. But he concedes, thus far, his fears have been proven wrong. “I thought we might see evidence of that in the first quarter results; not a chance – they were blow out.”
The Bull Case For Facebook
However, while some investors were worried into offloading their stakes in Facebook, others took the opportunity to top up their exposure at a depressed price. We’ve already revealed why the Bronze Rated Carmignac Patrimoine upped its stake by 25%.
Others did similar, though it’s not clear they were quite as bullish as the French asset manager. Ben Rogoff, manager of the Polar Capital Technology Trust (PCT), moved from an underweight position to overweight; while Michael Dillon, co-manager of the Brown Advisory Global Leaders fund, tells Morningstar his offering also bought more in Q1.
The reason Rogoff decided to underweight Facebook in the first place was due to the weakening engagement trends. But he changed his mind after being suitably impressed that it reported little impact on engagement after the Analytica scandal.
Both Rogoff and Dillon subscribe to the view that, as Rogoff puts it, “if people are giving you a product and you’re using it every day and you haven’t paid any money for that product, the chances are that you should realise that the product is you”.
Dillon says the firm has transitioned from being a one-sided network – where the more users are on a network the more useful that network is for everyone else – to becoming the classic two-sided network – where there’s a supply and demand effect.
This poses some problems. On a one-sided network, it’s crystal clear who the customer is; on a two-sided network, you have two different customers, he explains. Facebook needs to decide who is the primary customer and who is the secondary customer. “You’ve got to satisfy both.”
“For most two-sided networks it’s the suppliers that pay the bills,” Dillon continues. In Facebook’s case, this is the advertiser. The secondary customer, then, is Joe Public, who “pay with their data”. Dillon admits Facebook has not done a good job in communicating that with users, but it’s getting better.
On the advertising front, Dillon reckons GDPR will be an interesting development, and potentially a positive for Facebook. While he expects many users to reject the targeted ads, this is likely going to be a mistake as they’re more likely to get ads that are less relevant and less interesting to them.
Dillon’s co-manager Bertie Thomson adds: “It’s important to remember that the Cambridge Analytica scandal was an abuse of Facebook, not an abuse by Facebook.” Rogoff agrees, noting that upon seeing an advert for a hair-loss product that does not do what it says it should, the reader of a national newspaper wouldn’t complain about the publication in which he saw the ad.
Facebook's Empire is Still Strong
One underlying problem the core Facebook platform faces is that it isn’t as popular with the younger generation as it is with their elders, “particularly when they see dads and grandparents all over Facebook”, notes James Thomson.
He adds that this has been a bear argument for a few years now, with many suggesting those who shunned Facebook would go to Snap or Twitter. However, what’s happened is that this younger generation is now on Instagram – which is owned by Facebook. It also, of course, owns popular messaging app Whatsapp.
The problem in Instagram’s case, according to Thomson, is that it doesn’t monetise as well as the core Facebook platform. “You don’t make as much money from the advertising as Facebook… I’m not sure why that is. I guess they would argue they’ll get there, it’s early days for them, and the growth rates are higher to compensate.”
So, while a few people are deserting Facebook, both in terms of users on the social media platform and investors in the firm, it seems more are sticking by it.
“Facebook is an entrenched element of day-to-day life for billions of people,” says Stephen Yiu, chief investment officer at Blue Whale Capital. “Once you also account for Instagram and WhatsApp, the Facebook empire looks as strong as ever and should continue to benefit from the structural shift to digital advertising.”
While James Thomson is currently on the sidelines, he doesn’t rule out buying back into Facebook should it continue to show evidence that engagement and time spent on core Facebook isn’t about to fall off a cliff.
It shoud also be noted that Facebook's share price is now back up to the record high level it reached in early February at $193.
