Is the Facebook share price in trouble? Or is now the time to buy?

October 15, 2021 0 Comments

The Facebook (NASDAQ:FB) share price has had quite a rough couple of weeks. What happened?

Its IPO in 2012 seems like a century ago now. At the time, the firm’s revenue stood at $5bn, and it was the darling of the web 2.0 start-up generation. In 2010, Mark Zuckerberg was on the cover of Time Magazine as the Person Of The Year, thanks to his new style of communication and game-changing way of exchanging information. 

Fast forward to today, and a lot has changed. The company is now under much scrutiny regarding privacy, the Cambridge Analytica scandal, and most recently, a whistleblower claiming the company’s engagement algorithms are designed for profits above users’ wellbeing. 

Facebook owns both Instagram and Whatsapp. Looking at its second-quarter 2021 results, daily active users, a key engagement metric, reached a new all-time high of 1.9bn. That is undoubtedly impressive and great news for the business. However, if the whistleblower report is accurate, the firm has a conflict of interest between maximising shareholder value and the mental health of its users. As such, Facebook’s days of self-regulation may soon be coming to an end.

The impact on the Facebook share price

The stock is currently down 17% since its all-time high in September last month. Clearly, investors aren’t too pleased about the current allegations against the company. But will the decline continue?

Facebook ultimately makes its money by selling advertisements on its various platforms. Thanks to the seemingly endless amount of data at its disposal, serving targetted advertising for other businesses has proven to be exceptionally lucrative. But it can only grow if user engagement grows. The claim by the whistleblower is that the content algorithms deliberately promote negative and provocative content. These posts have a tangible impact on mental wellbeing but also receive higher engagement levels. 

Regulators are being pressured to introduce their restrictions on all social media platforms to mitigate this profits-over-the-wellbeing problem. But as it stands, no such action has been taken. Therefore, Facebook can continue as normal, delivering more value to shareholders. And, in turn, lead to a higher Facebook share price.

The challenges that lie ahead

The purpose of this piece is not to present a solution to this social problem. But rather talk about the implications and future value of Facebook.

The risk of regulatory intervention seems high, especially as the firm has been laying out plans to provide a platform for younger audiences. Personally, I doubt external regulations will prevent the Facebook share price from growing over the long term. But it would likely cause some disruption in the business model and trigger a slowdown in growth. 

But beyond this, Facebook has other threats to contend with. Its services recently suffered from an outage across all its platforms that took over six hours to rectify. The problem boiled down to human error. But the end result was a significant period during which advertisements couldn’t be served. For businesses dependent on daily promotions, the outage was a massive problem. And may have led many to run adverts on alternative social media platforms, resulting in lost revenue for the business. 

Time to buy?

The recent fall in the Facebook share price may have potentially opened up a buying opportunity for my portfolio. However, I’m personally not tempted at this stage. 

The firm may be able to continue delivering growth in a regulated environment. But there are currently too many unknowns at this stage for my tastes. Therefore, I’m going to wait and see what happens for now.

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Imran Dean does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned at the time of writing. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

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