Facebook may be a revenue generating machine at the moment, but handling the customer privacy issue won’t come cheap, says equity manager John Zechner, who advises investors to wait a little longer before jumping into the stock.
“Full disclosure, I’m short Facebook and I have been for a little while,” says Zechner, of J. Zechner Associates, to BNN Bloomberg. “We got short well before the [first quarter 2018 earnings report] and even before the Cambridge Analytica scandal broke, just because of valuation, growth and everything else.”
The social media giant saw its share price plunge in February and March when news broke of that Facebook users’ information was improperly used during the campaign period leading up to the last United States presidential election. Last week, Facebook reported its first quarter 2018 financials, showing little ill effects of the scandal and posting a 63 per cent rise in profits for the quarter, a 49 per cent increase in revenue and a 13 per cent rise in monthly active users.
“It was phenomenal earnings last week and they continue to basically own the online advertising market after coming from nowhere,” says Zechner. “Cash generation is huge and they have two billion monthly active users which is a good base that you can work from.”
At the same time, Zechner believes that the true impact of the privacy issue has yet to be felt.
“I certainly know enough people who are opting out of it just because of the privacy issues — that’s not going to be a huge impact necessarily, but it’s the beginning of it,” he says. “More importantly, in order to assure users about data privacy, the amount of money that they’re going to have to spend … when [CEO Mark Zuckerberg] talks about hiring 20,000 new employees, that’s not costless. I just think your costs are going to start to rise and I think that might impact the profit growth and maybe the margins to some degree.”
Zuckerberg appeared before US Congress in April, saying that he would make amends with Facebook users and try to do more to make sure that Facebook’s apps and tools are kept from causing harm.
Zechner says that investors keen on buying Facebook may want to hold off, as there may be further dips upcoming.
“Valuation wise, [Facebook] has actually now sunk to a point where it’s only a little over 20x forward earnings, which is sort of a market multiple,” he says. “I’m seeing both sides of the case. I sort of like the story longer-term. They’ve got some headwinds ahead of them, and if you’re a buyer, I’d probably wait on the sidelines for a bit and I think you might get a better opportunity to add to it at a lower price.”
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