Problems pile up at Facebook but its stock tells a different story

Facebook – users don’t trust it, news coverage on it is mostly negative, yet its stock keeps soaring.  This time though, with Apple’s latest privacy updates, Facebook is not getting off so easy.

Ignorance isn’t always bliss

This week, the WSJ released the “Facebook Files”, adding to Facebook’s already long list of alleged misconduct:

• User data was accessed illegally to influence the outcome of the 2016 election.
• Misinformation problems were put on full display during COVID when false information about the vaccine spread.
• Researchers found negative mental health effects in teens from Instagram – forcing a pause on its Instagram Kids platform.

Facebook is failing to address these issues, adding to its growing publicity problems.  In addition, regulators are aggressively trying to break up its three core businesses (Facebook, Instagram, Whatsapp). Meanwhile, its stock is up nearly 200% over the last two years.

Apple hits where it hurts

Why is Facebook’s stock so resilient? It’s so addictive that advertisers and investors are willing to look past it:

• Facebook is on track for $199b in revenue this year – more than the world’s biggest tobacco, beer and casino companies combined.
• People spent more time online during the pandemic, nearly doubling Facebook’s profits as advertising sales soared.

Apple’s recent iOS 14.5 privacy changes – the latest addition to the longstanding feud between the two giants – will hurt Facebook. The update lets users opt-out of apps tracking them across the web, and Facebook expects advertisers to spend less because of it.

Investors: Live by the ad, die by the ad

Lower ad spend is dangerous to Facebook – which generates 98% of its sales from ads, despite trying other avenues:

• Facebook acquired WhatsApp for a $19b price tag in 2014, but is still having trouble monetizing it.
• The company released hardware products by acquiring Oculus and launching Portal.

Facebook’s problems could turn users and advertisers to social platforms like Snap (NYSE:SNAP) and TikTok, which are seeing massive user growth, high penetration among younger users and strong traction among advertisers. Facebook will need to prove it’s still an effective advertising platform, or risk becoming the next MySpace.