A Perfect Storm Is Bearing Down on Facebook Stock

Credit: iStock.com/mactrunk

Can FB Stock Survive?

Long-time readers know I’m a huge fan of Facebook Inc (NASDAQ: FB).

But investing is a cold-blooded business. So when I see Facebook fighting off three different scandals, it’s time to consider—at least consider—turning bearish on FB stock.

Hopefully, we won’t have to…

But these issues aren’t random flesh wounds. They’re symptoms of a deeper problem with FB stock, which is why I’m taking them so seriously.

  1. The $100,000 of political advertising from “inauthentic accounts.”
  2. The controversial labels in Facebook’s ad-buying platform.
  3. The violent videos shown on “Facebook Live.”

Once you peel back each of these problems, you’ll notice the same underlying cause: Facebook’s dependence on algorithms. It is Facebook’s greatest strength and greatest weakness.

Moderators weren’t able to spot the $100,000 in fake news targeting because Facebook relied more on algorithms. Also, Facebook algorithms automatically created advertising categories for people who identified as a “Jew hater” or searched for “How to burn jews.”

And finally, there was an awful video of someone committing suicide posted to Facebook Live.

Why wasn’t it blocked by Facebook’s moderators? You guessed it—Facebook was so focused on algorithmic censors that it failed to implement human checks on content.

Also Read:

The Top Reasons to Be Bullish on Facebook Stock

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What happens if Facebook can’t solve these problems? What happens if the same mistakes crop up over and over again? What happens if investors start to panic?

What happens if Facebook can’t solve these problems? What happens if the same mistakes crop up over and over again? What happens if investors start to panic?

Relax…breathe easy, dear reader.

These problems are serious, of course, but they will not break the growth trajectory of Facebook stock. Let me explain why…

Facebook Is an Earnings Beast

Given a choice between money and reputation, most people choose money. This is especially true in business, where investors and executives make decisions purely based on a profit motive. And, boy, does Facebook make a lot of money.

Revenues jumped 45% to $9.32 billion in its most recent quarter. And nearly 42% of that trickled down to the bottom line, meaning that the company made $3.89 billion in a single quarter.

Facebook’s been earning this much money for a long time. So long, in fact, that it has $35.45 billion sitting in the bank. This is the fundamental strength that drove FB stock up 662%.

FB Stocks Chart

Chart courtesy of StockCharts.com

What’s my point? Simple: As long as Facebook makes more money each year, the market won’t care about its moral stance. Facebook could start building “Hellfire” missiles and it wouldn’t detract from its share price!

You know how I know that? Because Lockheed Martin Corporation (NYSE:LMT) and Northrop Grumman Corporation (NYSE:NOC) are trading at all-time highs.

Cigarette stocks, gambling stocks, marijuana stocks—most of these “sin stocks” are outperforming the market. Clearly, investors don’t invest based on reputation. They care about the money, dear reader.

Also, Facebook Might Be Expanding to China

China is another reason to stay bullish on Facebook stock.

It is the final frontier, the Holy Grail, and El Dorado all wrapped up in one. Put another way, having access to that many new subscribers would send FB stock price to the moon.

But what makes us think that Facebook will expand into China?

For one thing, other tech companies, like Airbnb, Inc. and LinkedIn Corp (NYSE:LNKD), recently received permission to operate within China. This signaled greater leniency for U.S.-based companies, thus sparking speculation that Facebook will be next.

Moreover, Mark Zuckerberg took Mandarin lessons simply so that he could travel to China and give speeches in their native tongue. At a certain point, you figure that level of commitment has to pay dividends.

While the expansion is hypothetical at the moment, Facebook spokespeople did say that, “We have long said that we are interested in China, and are spending time understanding and learning more about the country in different ways.” (Source: “In China, Facebook Tests the Waters With a Stealth App,” The New York Times, August 11, 2017.)

In other words, Facebook is waiting for the green light from Chinese regulators.

Analyst Take: 

The algorithm issues are troublesome, of course. But it’s unlikely that investors will weigh those PR mishaps more heavily than a potential expansion into China. Which, if true, could send Facebook stock soaring past the $300.00 level.

In fact, based on China’s internet penetration and penchant for social media, we could possibly see FB stock reach the $400.00 level once revenues start coming in. That’s 133% upside!

So there you have it, dear reader. We have completed our due diligence on Facebook and found absolutely no cause for reversing our bullishness.