A steep decline in stock prices for Facebook and Twitter has investors worried.
Do the drop-offs signal long-term trouble for the companies, or is it simply a reset issue, waiting for investors to jump on low prices during the dip?
Facebook took the brunt of investors’ ire, with its share price falling 21 percent on July 25, following a downbeat earnings report that the company fell short of revenue forecasts and after Facebook management issued a relatively bleak forward guidance statement.
Twitter had problems of its own. On July 27, the social media giant’s stock price slid by 20.5 percent, after Twitter’s user base figures failed to meet analyst expectations. Like Facebook, Twitter management issued forward guidance for the remainder of 2018 that failed to impress investors, driving Twitter’s share price downward.
Performance problems with Facebook and Twitter stock prices have spilled over into heavily populated technology funds. The benchmark Technology Select Sector SPDR ETF (XLK), for example, fell one percent in the last week of July.
Additionally, the tech-heavy AdvisorShares New Tech and Media ETF (FNG) has seen a fairly remarkable shift – its biggest investment position is cash, at 14 percent. Perhaps more surprisingly, Scott Freeze, chief investment officer of Sabretooth Advisors, which manages FNG, said, “I don’t see us being heavily invested in Facebook ever again.”
Investors Turning On Social Media Stocks
Just how dire is the situation with big social media stocks like Facebook and Twitter?
Wall Street watchers who specialize in the technology sector say social media sites are losing trust with consumers and that’s negatively impacting stock prices.
“Investors may say they want ‘privacy first,’ but history tells us what they really want is ‘profits first,’ said Peter Kendall, chief analyst for U.S. Markets and Cultural Trends.
The decline was more of the “drip, drip, drip,” variety, as bad news on the privacy front took its toll.
“First came revelations that Facebook had been “weaponized by Russia to try and sway the 2016 election,” Kendall said. “Then came reports of Facebook’s failure to protect users’ private data, followed by more and more revelations about privacy issues and Facebook’s controversial defense of posting conspiracy theories and holocaust deniers on its social media platform.”
That 18-month long “public relations nightmare” caught up to Facebook’s stock price in one swoop. “We’re seeing a dramatic shift in investor psychology toward a less-forgiving nature,” Kendall said.
Social Media Users Getting Little “Satisfaction”
A big part of the shift away from big social media stocks in late July is that consumers seem to be tiring of digital-based social and business engagement.
According to the latest ACSI 2018 E-Business Report, Facebook, LinkedIn and Twitter have the least satisfied users in social media. The report ranks the social media sector among the bottom five of all industries measured by ACSI, and the lowest of the three e-business categories.
“Privacy concerns, bots, and toxic online discourse have taken their toll on social media. But users report they’re even less satisfied with the amount of advertising on social media sites than with privacy protections,” said David VanAmburg, managing director at ACSI. “Privacy is important to users, but is often in the back of their mind. Advertising is in their face, and unlike with TV and radio, where they’re used to advertising, users don’t want to be inundated with ads while looking at pictures of their grandkids or watch a commercial before a YouTube video.”
Twitter fared particularly poorly in the report – its six percent plunge in user satisfaction is the biggest drop in the category, fueled by fake accounts, bots, abusive content, misinformation, and other far-reaching woes, the ACSI states.
Unfortunately for Twitter investors, the company had to engage in some much-needed user base house cleaning, a move that looks bad short-term, but should help over the long haul.
Timofey Fortunatov, a communications and social media specialist at Tugush Blockchain Finance said, “Recently, Twitter began actively banning of bot-based accounts. In the process, Twitter identified nine million potentially harmful accounts, he said. “The banning campaign should generate strong growth, but time for this to happen is required.”
Sustained Downfall Or Buying Opportunity?
Investment specialists differ over the long-term implications of Facebook and Twitter share price declines.
Robert Johnson, principal at the Fed Policy Investment Research Group in Charlottesville, Va., said, “The downside for Facebook and Twitter stocks is more concerning than the attractiveness of the potential upside. Both companies have witnessed meteoric increases in stock valuation and, despite recent declines, are still way overextended in my view.”
One of the fundamental tenets of value investing is the margin of safety. Stocks with a large margin of safety sell at a price that is a substantial discount from its true or intrinsic value, and that has its perks.
“A stock with a large margin of safety can withstand unexpected developments much better than stocks with a lower or no margin of safety,” he said. “The bottom line with Facebook and Twitter is that a margin of safety simply does not exist.”
Others say a reality check is in order –and a buy on the dip – especially on Facebook.
Andrew Selepak, a telecommunications professor and director of the graduate school social media group at the University of Florida says not to expect Facebook to disappear anytime soon.
“Facebook still has over two-billion monthly active users and has the Midas Touch when it comes to buying other companies and innovating and improving their existing products,” he said.
Looking at its purchases, Selepak has a point.
“The purchase of Oculus put Facebook at the forefront of Virtual Reality, purchasing WhatsApp made it a major player in encrypted communication, Instagram has become a Snapchat killer with Instagram Stories and IGTV is the first serious contender to YouTube.”
Keeping his optimisim, Selepak says Facebook could still see another stock decline, but thinks the company will ultimately remain highly profitable for investors.
Selepak isn’t as bullish on Twitter, which hasn’t had the same luck as Facebook when it comes to business and revenue.
“Twitter’s purge of nearly 70-million accounts means the platform has lost nearly 20 percent of users,” he said. “And Twitter, unlike Facebook, has had the opposite of the Midas Touch when it comes to acquisitions.
Their 2012 purchase of Vine and 2015 purchase of Periscope were both failures as Instagram updates killed off both with video and Instagram Live.”
“Twitter is already becoming a niche-platform and often seems to only exist so Facebook can’t be seen as having a monopoly on all social networks,” Selepak said.
For the record, analysts who cover social media stocks don’t see a great deal of near-term upside on Twitter. The consensus one-year estimate share price stood at $34 on July 31, barely above its $32 per-share trading price.
Facebook fares better in the same category, with its one-year price estimate at $212, up significantly from its current stock price of $170 per share.
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms. Brian may be contacted at email@example.com.
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