Facebook Whistleblower: Time to Sell the Stock?


Score another victory for the Facebook (NASDAQ: FB) hateful. The company was put on the defensive again last week when whistleblower Frances Haugen, the company’s former product manager, testified before Congress. She shared internal reports that the company discovered that Instagram could encourage teenage body image issues, alleged that Facebook’s cyber espionage investigation unit was severely understaffed and said that the company consistently prioritizes profits over people by promoting potentially harmful content.

The criticism joins a larger theme that has crystallized in some intellectual circles: Facebook is bad, period. In combination with a massive outage that took Facebook, Instagram and WhatsApp offline on Monday, the news caused the stock to drop 5% that day, a response to 60 minutes airing an interview with Haugen on Sunday evening.

Image source: Facebook

CEO Mark Zuckerberg spoke up for the company in a lengthy post, pushing back against the idea that the company puts profits above safety and well-being. The Facebook chief said the company has deliberately taken steps to move engagement away from things like viral videos and closer to friends and family, the company’s core mission. Zuckerberg also, once again, called on Congress to act to regulate the use of social media and the Internet, especially for children and teens.

Before we explore whether it’s time to sell Facebook, let’s take a look at what the direct effect of Haugen’s testimony will be.

Regulation will finally come

Regulation is likely to come to social media, and it should. After all, other forms of media have rules and restrictions in most of the ways Zuckerberg requested. Children under 17 can’t watch an R-rated movie without an adult, and TV shows and video games come with explicit content warnings, just like music in the analog era. You also cannot use profanity or show nudity on TV or radio. If these rules exist for traditional media, then there should be an equivalent for social media. The problem is, it’s a lot harder to do that with social media because there is so much more content, and a lot of it is only seen by a few people.

Zuckerberg has been calling for this kind of regulation for years, and Congress should act, especially if it agrees with Haugen’s testimony. But I think the CEO is too right – that it’s unrealistic for Facebook to control itself when lawmakers haven’t clarified the rules of engagement, and it’s unfair to expect the company to spend maybe billions on itself. control and improve the security of the platform when competitors like Twitter, YouTube and Break not having to spend anything. The fact that Facebook even needs a cyber espionage unit shows that the government should be more closely involved with it.

Regulating social media would likely benefit Facebook by setting the boundaries of the playing field and removing at least some of the burden on the business that has to defend itself whenever these criticisms arise.

Facebook’s reputation is a vulnerability

Events like the one in Haugen also damaged the company’s reputation. This is a risk because it damages the company’s brand with another important audience: current and potential employees. Zuckerberg’s message was a copy of the missive he sent to all Facebook employees; and boosting morale when incidents like this occur has become a recurring requirement of his job. Facebook is also seeing a decline in usage among those under 24, and while this is more about competition and demographics than high-level political debates, having a bad reputation can only make this problem worse. Finally, it is also hurting the Facebook stock, which has always traded at a discount to its fundamentals and growth prospects, in part because investors fear a rupture or even an exodus of its user base.

Facebook's thumbs up on a sign at company headquarters.

Image source: Facebook

But there is good news

All of this may be true, but the vast majority of Facebook users probably won’t care about Haugen’s comments. In fact, most of them probably won’t even know. After all, most Facebook users don’t speak English and haven’t followed the US Congress. Most Facebook users have demonstrated time and time again that Facebook gives them real added value – whether as entertainment, a way to connect with friends and family, or as a platform for them. voice their opinion – and that they will continue to use it. regardless of the broader cultural discourse around the company. The more than 7 million businesses that advertise on Facebook feel the same way. The value added by the company is greater than any broader social costs of using the platform.

We know this because Facebook has been tested time and time again by crises such as the 2016 election hack, the Cambridge Analytica scandal, and the Stop Hate for Profit boycott that emerged after the murder of George Floyd. Each time, the company has escaped virtually unscathed.

No reason to sell

The risks for Facebook always seem exaggerated next to its benefits. Ultimately, the company offers real added value to its users. Otherwise, they wouldn’t use it. Zuckerberg closed a recent article by saying, “When I think about our work, I think about the real impact we have on the world – people who can now stay in touch with loved ones, create opportunities to support themselves. needs and find This is why billions of people love our products. Billion of people. Only a few companies in the world can make this claim.

The reality is that the media narrative belies what’s going on in the real world, where most of the 3 billion people who use Facebook are making a rational choice to do so because, overall, it’s a positive force in their lives. life. This distortion and the surrounding regulatory fears have led to a poor valuation of Facebook stocks and explains why they are still so cheap. Based on the price / earnings (P / E) ratio, it is cheaper than all of its FAANG peers, even though it is growing faster than most.

The stock has already recovered some of its losses on Monday, but any continued weakness due to Haugen’s testimony seems like a great opportunity to recover some stock.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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