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Facebook's share price is still falling… Should you buy the dip?

by , 22 February 2022
Facebook's share price is still falling… Should you buy the dip?
It's been a tough start for equity markets this year. Last night the Dow fell more than 600 points, which is the worst decline yet in 2022. And that's saying something. As I warned in November last year (near record highs for the tech-heavy Nasdaq) higher inflation numbers will put pressure on growth stocks.

The Nasdaq composite fell another -2.9% last night. That means the index is now down -14.12% for the year and still inching closer to bear market territory.

Now, since some of the Nasdaq counters are still doing well, the -14.12% fall in the index does obscure some of the more horrendous tech-collapse stories this year. One you may consider is Facebook (now called Meta).

The stock disintegrated on its most recent earnings report, falling more than 20% on the day. But that still wasn't enough. The stock is now down -38.65% for the year and, as a savvy investor, you may be thinking now is the time to start bargain hunting.

You may be surprised to find, even after one of the world's largest companies has halved in value, I still don't think it's a buy.

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The true threat to Facebook comes from an entirely different front
 
Facebook has come under significant fire over the last few years due to its influence on politics
 
Some analysts have gone so far as to blame the company for Donald Trump’s victory as well as Brexit. However, the worst accusation is likely its possible role in the ethnic cleansing of the Rohingya people in Myanmar. At the time I thought that there was a significant possibility that the company would come under so much scrutiny that they wouldn’t survive as a viable business politically.
 
I’ve previously warned MoneyMorning subscribers, in this Friday edition, that regulation could easily stifle or kill this business altogether.  
Surprisingly however, the true threat to Facebook is now on an entirely different front: Apple and Google (now called Alphabet).
 
To understand the predicament, you need to know a little about Facebook’s business model.
 
Firstly, Facebook makes its money from advertising. If you’re a Facebook, WhatsApp or Instagram user, you’re not Facebook’s client. Clients pay for a product. The real clients of Facebook are the marketing agencies and businesses that use their platform to sell products.
 
You might have heard the saying: If you’re not paying for the product, you ARE the product!
 
This is exactly true of Facebook users.
 
To effectively sell advertising, a platform needs to be able to get a company’s message to its desired audience.
 
In the past, this was a bit hit and miss. People would broadly advertise to a wide audience in the hope their product would be picked up. This is still true on most TV, radio, newspapers, and billboard advertising.
 
The outlets can give you some information around your client. Billboards for example will likely target people in that geographic area. The type of content the TV channel produces will give advertisers a good guess as to what the audience demographics looks like, but it’s still nowhere close to what can be achieved by the giant digital data sets.
 
This type of super targeted advertising has been pioneered by companies like Facebook. Their clients get to advertise exactly to the “right” people.
 
But that is now becoming the problem.
 
To maximise the amount of information they had on their users, Facebook didn’t just monitor what people did on their site or app, but across the entire web. They did this by tracking your use of non-Facebook sites and apps as well. Most users don’t even know it’s happening.
 
Now the European Union has already started regulating how the social media giants collect and manage data (which is one of the reasons for the sell-off after results).
 
But Apple (with IOS) and Google (with Android) have come to the party.
 
Through these two operating systems they are basically in control of almost all mobile computing space. That means Apple and Google can choose what they allow on their systems.
 
Both have come out recently saying that they are looking to ban the practice of cross app tracking.
 
That is a Facebook killer.
 
Before you praise these companies, remember Google and Apple actually have a partnership. Google pays Apple billions of dollars every year for the privilege of being the default IOS search engine. The policy from Apple alone is costing Facebook over $10 billion a year already.
 
Yes, these two mega giants are deliberately targeting Facebook.
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But things at Facebook are even worse than that…
 
Normally, when a company faces these kinds of incredible headwinds, a good leader focuses almost exclusively on solving the issues. Instead, Facebook CEO Mark Zuckerberg is apparently totally distracted by his pivot into the Metaverse.
 
For those that don’t know, the Metaverse refers to virtual reality experiences that Zuckerberg believes is, not just the future for Facebook but the internet as a whole. If he’s correct it could prove to be a game changer for the company.
 
But it’s very early days, and Facebook has a very limited track record of major new innovations. Both WhatsApp and Instagram were acquisitions not Greenfields projects like the Metaverse.
 
The capital expenditure for the Metaverse project is enormous. It’s a significant and very risky bet for the company. If investors lose faith, which seems to be happening as the stock plummets, it will make it practically impossible for Zuckerberg to finish the project even if it was ultimately going to be successful.
 
Facebook is the F in FAANG: Facebook, Apple, Amazon, Netflix and Google. The acronym has become synonymous with the blue-chip tech sector.
 
Unfortunately, I now firmly believe its place there is unjustified. Another company that likely shouldn’t be on the list is Netflix, but that’s a discussion for another day.


Facebook's share price is still falling… Should you buy the dip?
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