It’s been a tough week for the tech giant following what turned out to be a disappointing set of earning results driven by what has been labelled as “fake news”. Seems like Facebook can’t get its story straight and loves to spread bogus information. For example, what does Justin Bieber, Paul McCartney, Jackie Chan and Sylvester Stallone have in common? According to Facebook they’re all dead. Not only have they found themselves victim to the worst kind of hoax, but this misinformation is being spread from one corner of the globe to the other. The fake news posts start circulating, users start clicking on the post to read the fake news, and before you know it, stars like Stallone are declared dead and mourned – despite being very much alive.

The fake news crisis doesn’t stop with death hoaxes, it runs a lot deeper. Whether true or not, the rumours are that “fake news” became public during the 2016 US election campaign. Thousands of rubbish websites were used to house fake news. The falsified information spread and is believed to have swayed the results of the election. Over the course of the election cycle, Trump’s campaign shovelled $90 million into Facebook via digital advertising. Trump’s campaign embraced Facebook as a key advertising channel. No other presidential campaign has done this before, not even Clinton’s. Much of the fake news was aimed at helping Trump win. The result: Trump won.

As a result, the term “fake news” was coined and is now so prevalent that it’s hard to know what is real and true. Politics and fake news is destroying Facebook. The social media platform isn’t the platform it used to be, filled with pictures of children, music, foodies showing off their food and gym junkies flaunting their bodies. Log onto Facebook today and much of this is gone. It’s been replaced with one political rant after another, pictures of animals being boiled alive, hate, abuse and conspiracy theories. Every time Trump makes a public rant on Twitter, Facebook becomes inundated with keyboard worriers turned political analysts ranting and raving about things they have absolutely no idea about.

Why does this matter?

It matters because all of this, boils down to one thing: Lower earnings. Weaker revenue and user growth, combined with a warning from management that it will continue. It caused a 20% fall in its share price this week. About $120bn was wiped off its market value after its results became public. Sales were lower than analyst estimates and previous growth rates. User growth was flat in the U.S. and Canada. It fell in Europe from the previous quarter. Here are the main dot points from the result:

  • Earnings per share: $1.74 vs. $1.72 per a consensus estimate
  • Revenue: $13.23bn vs. $13.36bn per consensus estimate
  • Global daily active users (DAUs): 1.47bn vs. 1.49bn consensus estimate.
  • North American Daily Active Users (DAU): 185 million vs. 185.4m.
  • European DAUs: 279m vs. 279.4m according to a FactSet estimate.
  • Average revenue per user (ARPU): $5.97 vs. $5.95 according to a StreetAccount and FactSet estimate.
  • Facebook said 2.5 billion people were using any of its suite of apps each month, including Instagram and WhatsApp.
  • European DAUs were down from 282 million last quarter, potentially related to the effect of the enactment of the General Data Protection Regulation (GDPR) in the European Union. The set of regulations gives users more control over their online data.

Whilst earnings were a miss on most EPS, revenue and profit, there is still some hope for the company. Headline numbers weren’t too bad.

  • Facebook’s headcount increased 47% year-on-year, to 30,275.
  • Monthly active users was still up 11% and Daily active users was up 11% year on year.
  • Advertising revenue was up 42%
  • Payments up 23%
  • Facebook’s revenue in the second quarter was up a whopping 42% year-over-year.

These numbers fell short of Wall Street expectations but they were still OK numbers. This lead us to believe that the share price fall was a much-needed correction rather than a change in trend. What we’re seeing here is the old case of Wall Street’s expectations were way too high. The company disappoints and the share price falls back to earth. Expectations are reined in and hopefully, shares track higher again. The bright spot that investors seem to glaze over is Instagram. It has become an absolute monster in terms of user growth and engagement. It may not earn as much in revenue but still is expected to contribute a sizeable chunk to Facebook’s advertising revenues.  Here is CEO Mark Zuckerberg’s recent response to the fake news saga.

The real concern is whether the ‘fake news’, ongoing fallout from the spread of Russian propaganda and the Cambridge Analytica scandal is causing a shift away from Facebook. What is Facebook doing to fix this concern? CEO Mark Zuckerberg has admitted Facebook is broken and as a result has set a goal to ‘fix’ fake news, hate, and abuse. It’s his personal challenge. The site is making too many errors when enforcing new policies and is one scandal away from losing the trust from an already divided world.

So far, the social media platform has taken steps to make a change. It has employed 30,275 personnel to handle safety and security on its platforms and to tackle fake news. Its a step in the right direction. Facebook has recognised that there is s serious problem and wants to make this year the year of self-improvement. It has a lot of work to do to rid the site of hate, abuse, fake news and corruption. Zuckerberg said, “If we’re successful this year then we’ll end 2018 on a much better trajectory”. With this in mind, we are confident that Facebook is aware that if its issues aren’t fixed, it could drive its certain downfall. Facebook has somehow managed to endure highly public scandals in the past but we aren’t so confident it will cope with another public scandal.

At Wattle Partners, we hold Facebook in the Thematic Bucket through a number of managed funds. The 20% share price fall is somewhat concerning, but not enough to warrant a sell. We think it’s simply a mere correction, and not anything damaging. The company has promised a safer and clearer site, with less spam, fake news, and fake accounts. None of the fake news sandals has affected Instagram. Facebook does expect revenue growth for the 3Q and 4Q to be a touch lower because more data privacy options and new initiatives like Stories and Watch could impact revenue growth. This is a good thing. Short term pain, for a much longer gain. We think the recent pullback is a great buying opportunity for those who have been waiting for a good entry point to buy Facebook. For that reason, we are holding on.