Facebook (FB) is evil. I have been meaning to write an article with that lede for the past few weeks, and today's unprecedented plunge in FB shares has given me the opportunity. The genesis of that first sentence was the news I was reading during my travels in Asia, specifically disturbing reports of lynch mobs in several Indian cities ginned up by messages purporting to have evidence of criminal behavior that spread like wildfire via Facebook's WhatsApp messaging service.
Those stories didn't find much traction in the U.S. media, but they really are horrifying. Add to that CEO Mark Zuckerberg's seeming confusion whether Holocaust deniers should have a platform on Facebook and the recent release of a memo written by Facebook VP Andrew Bosworth in 2016 that contained this memorable quote: "So we connect more people. That can be bad if they make it negative. Maybe it costs someone a life by exposing someone to bullies. Maybe someone dies in a terrorist attack coordinated on our tools."
The question for an investor is: does this matter? An investor can choose to buy stocks in companies that make guns, cigarettes, fossil fuels, and any number of other products that certain sections of the populace find objectionable. Should Facebook be held to higher standards than those companies? That's really up to the investor and his or her conscience. I don't judge. The Cambridge Analytica scandal was just about the worst PR event that any company could experience, and all that did for FB shares was drive them to an all-time high during Wednesday's trading and a valuation of over $625 billion.
Things can change quickly in a day, though, and I believe Facebook CFO David Wehner's downbeat guidance was driven by spending FB is doing to counter all the accusations of fake news, Russian hacker bots and the like. Wehner does a great job of not answering analyst questions during conference calls (that's an actual compliment not sarcasm,) but he did use two words repeatedly when discussing his belief that FB's operating margins will decline into the mid-30% range in "two or more years."
Those two words: safety and security. So, Facebook has been adding resources to combat bad publicity, and that leads to higher operating expenses. On the call FB management noted that the company's headcount has surpassed 30,000, and those incremental hires are expensive, especially given that Facebook's headquarters are located in Silicon Valley.
That's the real, financial cost of fighting fake news. Lower margins combined with slowing revenue growth rates mean that analysts will have to lower their long-term growth estimates for Facebook, and that is reflected in today's 20% decline in FB shares. It has been an expensive day for Zuckerberg and co. and I can only imagine he is not responding with a flip "Zuck it," the name of one of his early websites at Harvard.
This is real and this has to be addressed. Zuckerberg has not done a great job of handling public appearances of late--I found his Congressional testimony particularly underwhelming--and I believe it is time to unleash the company's not-so-secret weapon, Sheryl Sandberg, to mount a charm offensive. Facebook couldn't be much less charming than it has been in 2018. As that takes its toll on the stock, management needs to change its approach to public relations, or FB shares are headed to $150 with a bullet.