Fake News Crisis Hits WhatsApp — Should You Sell FB?

Stocks to sell

You would have thought Facebook, Inc. (NASDAQ:FB) had learnt its lesson. The Cambridge Analytica data scandal hit the stock hard. Shares plunged 19% in just one day, with Mark Zuckerberg losing almost $16 billion according to Forbes. But it wasn’t just the stock price — it was also the public image that was kicked into the dust. Facebook’s unauthorized sharing of private user data was pretty sketchy. And that has a knock-on effect on ad spend:

Check out this from RBC Capital’s recent survey: “The % of FB advertisers who plan to increase their spend on the platform has fallen from 66% in Sept. ‘17 to 58% in March ’18 to 49% in Sept. ‘18. We attribute this trend to the negative publicity the platform has received this past year and to rising prices on its network.”

Nonetheless Facebook’s popular apps Instagram and WhatsApp are both growing faster than ever. WhatsApp has over 1.5 billion monthly users worldwide. And trust in these apps is still high. Many people don’t even know that Facebook owns both these companies.

That is, until now.

Facebook’s WhatsApp: A New Political Weapon

Reports are emerging that the WhatsApp messaging service flooded voters with fake news and misinformation during the recent Brazilian election campaign.

Left-wing candidate Haddad alleges that businessmen supporting Jair Bolsonaro paid to deliver misleading propaganda to voters via WhatsApp in violation of electoral law. We are talking everything from false rumors, manipulated photos to decontextualized videos and audio hoaxes.

One conspiracy theory even held that Bolsonaro staged his near-fatal stabbing at a rally last month. Bolsonaro — who subsequently went on to win the campaign — denies the claim.

“Even if there is an order to give someone a fine for spreading fake news, by the time you do that, it’s gone, the elections are over,” Fernando Neisser, who coordinates the Brazilian Academy of Electoral and Political Law told the New York Times. “No one is ready to deal with the speed and the volume of this fake news problem.”

Tricky To Regulate

A key fact to bear in mind is that out of the 210 million people in Brazil, over 120 million have WhatsApp. This makes the free messaging tool an incredibly powerful way to reach people. Plus while the service’s end-to-end encryption keeps messages private (even from WhatsApp itself), it also makes it very difficult to regulate app use. After all, how can you regulate messages you can’t read?

In Brazil, WhatsApp took three main courses of action to deal with the problem. Namely: limiting how many people you can send a message to (now 20 in Brazil instead of 256), blocking 100,000’s of accounts showing ‘bot-like’ activity, and running ad campaigns on fake news identification.

Whether these will be sufficient to prevent another ‘WhatsAppgate’ remains to be seen — but I reckon it won’t be.

Now it’s beginning to look like security issues (whether privacy or fake news) will be a recurring problem for Facebook. If WhatsApp’s reputation is now in jeopardy, what would that mean for Facebook’s big monetization plans? For example, analysts are very excited about the fact that WhatsApp is beginning monetization with paid messaging and ads in Stories. The recently-launched WhatsApp Business API is designed to help businesses communicate with consumers.

(By the way, yes these are the very same monetization plans that spurred WhatsApp co-founder Brian Acton to leave the company and a whopping $850 million in unvested stock.)

The Bullish Case for FB

So let’s get the bullish facts out the way. TipRanks shows that Facebook still boasts a bullish Strong Buy top analyst consensus. Out of 33 analysts polled in the last three months, 27 still rate the stock a Buy. This is versus 5 Hold ratings and just 1 Sell rating. Get the FB Stock Research Report.

Who Says Sell FB Stock?

That lone Sell rating comes from a five-star analyst, Pivotal Research’s Brian Wieser (Track Record & Ratings). We can see here how he has just reiterated his Sell rating on the stock with a $125 price target. From current levels, that suggests prices could plunge a further 17%.

This is interesting because Wieser is an analyst who usually gets it right. Indeed, even on Facebook specifically his track record is undoubtedly impressive. He is currently tracking a 97% success rate and 26% average return per rating:

“As before, we continue to view the long-run revenue opportunities for Facebook more negatively than much of the investment community does because we see limits to growth for the overall advertising industry” Wieser explained recently.

Most notably, FB’s Q3 earnings call did little to persuade him that FB has a handle on its operational issues. In fact, Zuckerberg didn’t even mention the WhatsApp/ Brazil situation at all:

“Leading the call by talking about WhatsApp messaging and the positives of its encryption without reference to the ways in which its mass forwarding capabilities contributed to the spread of fake news during Brazil’s election this week or in India probably won’t endear the company to activists and governments concerned about these developments” writes Wieser.

Moreover: “Characterizing the shutdown of Partner Categories and tighter standards for Custom Audiences in context of protecting user privacy seemed somewhat disingenuous given how much data Facebook still collects on consumers and uses in ad targeting without informed consent.”

The Cost of Repair Could Be Huge 

Consequently, Wieser sees downside risks to opex relative to guidance. This is because of continuing systemic problems that manifest through under-investment in operating resources and risk mitigation. For Wieser, these problems include poor management of data partners and supplying advertisers with incorrect metrics, to providing a platform which has aided in social ills such as the destabilization of societies and genocide. That may seem a bit far fetched — but it’s not. In May UN experts investigating a possible genocide in Myanmar said Facebook had played a role in spreading hate speech there.

Bottom line: “If Facebook does appropriately respond to these and other problems, the costs could be substantially greater than even the company anticipates. Overall, post these results we are reducing our price target to $125 vs. $131 previously on a YE2018 basis. We continue to rate Facebook Sell.”

TipRanks.com offers exclusive insights for investors by focusing on the moves of experts: Analysts, Insiders, Bloggers, Hedge Fund Managers and more. See what the experts are saying about your stocks now at TipRanks.com. As of this writing, Harriet Lefton did not hold a position in any of the aforementioned securities.

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