Politicians have long looked with concern at the how content on the social network could influence opinion and elections, regulators have investigated allegations of anti-competitive practices and mis-use of personal data and co-founder Chris Hughes has even called for a break-up of the company. Staff protests over how Facebook continues to carry comments from President Trump over how the US street protests should be handled with force take the challenges facing chairman and CEO to another level but ultimately it is Facebook’s users who will dictate what happens next,” says Russ Mould, AJ Bell Investment Director.
“Money talks. And money will flee, in the form of advertisers and then in terms of profits, cash flow and ultimately the share price should user numbers start to drop. If the Facebook-using public feels Mr Zuckerberg has got this wrong, and if they believe he should join Jack Dorsey and Twitter in policing comments and posts from President Trump, in the view that they potentially represented misinformation, then they can just stop using Facebook and use other ways of staying in touch with friends or colleagues.
“Admittedly, Facebook’s ownership of Facebook Messenger, Instagram and WhatsApp means that is easier said than done. But if users really do feel Mr Zuckerberg is in the wrong on this one, and that social media platforms are indeed publishers and thus responsible for what goes on them (and that Section 230 of America’s 1996 Communications Decency Act should indeed be abolished), they can make their views felt.
“Equally, users may decide Mr Zuckerberg is right in his stance that social media is not there to judge, moderate or censor content, but perhaps even not care about the ins-and-outs of Section 320 and stay firmly loyal to the companies services.
“Despite the fury vented by politicians, regulators and press in the wake of the 2018 Cambridge Analytica scandal, which followed allegations of how Russia had used the social media network to influence the 2016 US Presidential Election, users stayed with Facebook. They seemed happy to accept the trade-off that they could use the network at no monetary cost in exchange for their personal data being harvested, used and analysed.
“There may have been a slight blip in Facebook’s user number growth as the Cambridge Analytica scandal broke in Q1 2018, as the rate on increase dipped from double-digit to high-single digit percentages, but it did not last for long. According to the latest quarterly filing, since Q1 2018:
• Facebook’s monthly average user number has soared by 19% to 2.6 billion
• Average revenue per user (ARPU) has increased 26% to $6.95
Source: Company accounts
• First-quarter revenues have advanced by 48% to $17.7 billion between Q1 2018 and Q1 2020
• The company’s net cash pile has swollen from $30 billion to $51 billion, even after $18 billion of share buybacks and $33 billion of capital investment
Source: Company accounts
“Intriguingly Q1 2018’s net profit of $4.9 billion was 2% below the $5.0 billion recorded in Q1 2018 and earnings per share only rose because of the effect of share buybacks, so the scandals and regulatory probes are already starting to weigh. Facebook has had to add legions of fact-checking staff and invest heavily in development to fend off ‘fake news’ allegations and operating costs surged by 83% between Q1 2018 and Q1 2020 as a result.
Source: Company accounts
“The share price has shrugged this off, reaching fresh all-time highs as the company has been seen as a beneficiary of the lockdowns in response to the COVID-19 outbreak, allowing people to stay in touch with loved ones while they are stuck at home.
“Analysts believe this will result in sufficient profits growth momentum to justify its $660 billion market cap and 32 times and 24 times forward price/earnings multiples for 2020 and 2021, with even further upside to come. Earnings per share are forecast to increase by 13% in 2020, 33% in 2021 and by a further 18% in 2022.
Source: Company accounts, consensus analysts' forecasts from Zack's and NASDAQ
“Betting against the company’s powerful position has not been a good strategy since it floated in May 2012 at $38 a share but the issue of misinformation is back. It seems like employees have been riled like never before and now it remains to be seen whether users are upset and they choose to act, too.”
