Facebook Inc: News Driven Sell-Off Makes Facebook Inc. (FB) Stock An Attractive Buy

  • Facebook stock got hit with a wave of negative news, but most of it was over-hyped.
  • FB stock will soon recover, as much of the speculation is unsubstantiated/unwarranted.
  • Core fundamentals remain intact, as ad pricing and inventory were largely unaffected.
Facebook Issues With Advertising Metrics Are Way Over-hyped
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Facebook Inc.'s (NSDQ:FB) latest round of problems continued as reports of misreporting advertising metrics, controversy over the news feed algorithm which resulted in public out lash over Facebook’s influence on public sentiment and “Trump Scare” hit Facebook in the month of November.

Talk about eventful times, as investors make sense of the news and the potential implications on fundamentals. Even so, the news is usually noise excluding earnings results. And, I find some of the comments made by other public figures unsubstantiated, as it’s highly improbable that any amalgamation of the “sky is falling” rhetoric will impede Facebook’s share price performance, as the core fundamental narrative remains unchanged. (See also: Is Facebook Inc. (FB) Stock Set For A Big Rally?)

The news is designed to trick you into selling your FB shares

When things go wrong on the Internet the usual culprits are Facebook, Google, Time Warner Cable and Comcast. When things in America go wrong, the media will soon blame Trump (the president), and if the economy is sinking the same outlets will recirculate anti-big bank commentary to inflame the mistrust in big business while re-inserting the same cast of characters: JPMorgan, Bank of America, Wells Fargo and Goldman Sachs.

News is formulaic in nature. It’s mixed like salt and pepper, so everyone jumps on the same bandwagon.

The irony is that the big media outlets also operate like big businesses, and have a predictable flow in coverage.

Negative headlines generate viewership. And at times, it sends chills down the spines of investors as they react to the morning’s price action and scramble to find out what happened, which fuels more selling and so forth.

In general, news outlets prefer negative coverage, as it sells clicks. However, investors should not sell Facebook shares on negative news flow unless it’s earnings themed.

So, how should investors respond to the negative news?

Here’s a basic summary of what went wrong with Facebook's ad metrics reporting:

  • The 7-day summary on reach will decline by 33% on average, whereas 28-day summary will decline by 55%.
  • The reach figure will drop by an additional 20%, as reach will be measured based on actual impressions of content.
  • The reach of organic posts will decline by 60% on average for 7-day summaries, which is somewhat troubling, but doesn’t impact core ad revenue.
  • Measurement of video views for fully completed video views will increase by 35% on average, as attribution of a full view was diminished due to discrepancies in video/audio track length.
  • Time spent on instant articles was overstated by 7% to 8% due to a simple math error.
  • Referral traffic was overstated by 6%, as measurement of user behavior upon landing on a Facebook post/video included click throughs for other content.
  • Follower figure will drop by 5% on average, as list based followers will no longer be counted.

Many of the issues that Facebook reported seem manageable from an earnings perspective, as some of the mishaps are more an issue of inferring the meaning of a data set, whereas some of the other issues are basic math errors.

I’m amazed that these errors even occurred in the first place, but given Facebook’s willingness to improve organic reach metrics, marketers will be better positioned to engage audiences and track behavior.

Notwithstanding, I believe some of the speculation by the usual anti-Facebook punditry is misleading, as I don’t anticipate ad buying behavior to change meaningfully, or Facebook’s credibility to diminish substantially in the minds of advertisers.

A notable example of usual anti-Facebook commentary came from The New York Times:

But analysts said concerns about the accuracy of Facebook’s metrics could prompt some to question whether they should invest so much time, money and resources with the company. The impact of the disclosure of further calculation miscues, after the September apology, is uncertain. Yet a more skeptical view of digital advertising is emerging, not only for reasons of measurement but some major advertisers wonder if it is as effective as they had assumed.

While metric changes were mostly negative, the improvement in behavior tracking helps to explain lower conversions, and as such, social media agencies will be better positioned to serve relevant content in a user’s newsfeed. (See also: All You Need To Know About Facebook Inc.'s $6 Billion Share Buyback)

Furthermore, the change in reporting of organic metrics doesn’t directly translate into misrepresented pricing of advertising units, which is important for investors to recognize.

Goldman Sachs analyst, Heather Bellini reiterated her positive stance on the company and dismissed the downside risks cited by various members of the media:

We note that most advertisers and ad agencies we speak to aren’t surprised by miscalculations and that they often do their own measurement studies of ad campaigns on FB, just as they’ve always done for Google. We expect third party measurement to be relied upon more by advertisers and believe that FB may need to become a greater enabler of third-party measurement than it has in the past. This news does not change our view that Facebook is in a strong position to increase share of ad dollars as they shift online and to mobile.

Advertisers were already aware of discrepancies in Facebook’s metrics, and have instituted third-party analytics to measure performance more closely. Furthermore, a prior study from RBC Capital Markets still suggests that Facebook is the second best performing advertising channel for advertisers.

Source: RBC Capital Markets

So, if advertisers were aware of the reporting discrepancy, and rated Facebook the second best performing channel for marketing ROI, I think it’s safe to disregard the recent spate of negative news.

Furthermore, investors were nervous of a Trump Presidency and how it may impact Facebook, but again most of that is just noise.

Gene Munster at PiperJaffray mentioned that the risks of a Trump White House are overstated:

Net neutrality is unlikely to be reversed, broader tech innovation will push through regressive policies around immigration and education, and valuations are very attractive for each of the mega-caps, which have sold off despite any clear political reason.

Trump did not mention that he would repeal net neutrality on the campaign trail, and the broad generalizations on Trump have been a symptom of bad reporting from various journalists at various media outlets, which is why news themed selling of Facebook in response to Trump is ridiculous.

Furthermore, Trump hates big media conglomerates, so why would he repeal net neutrality to the benefit of Comcast, or any media channel that also operates as an ISP? The fact is, Trump isn’t going to nod his head at an AT&T and Time Warner merger, so why would he repeal net neutrality to the benefit of Verizon and various other ISPs? He’s anti-mainstream media and believes that the TV/Internet industry is made up of too few players, which was why he believes he fell victim to phony news coverage.

So, now he’s going to back legislation that further strengthens key media conglomerates? Yeah right! Now that’s some real wishful thinking folks.

Conclusion

I believe the recent round of news-themed speculation is unlikely to impede Facebook’s ramp in advertising revenue, perceptions of marketing ROI or reduce ad agency spend. In fact, the recent round of anti-Facebook news coverage wasn’t very balanced (not that it has ever been).

And while Facebook may tinker with its reporting metrics in the future and make downward revisions to viewership count, I find it highly unlikely that it will impact advertiser perception to the extent that it would diminish ad revenue ramp.

As such, I continue to reiterate my buy recommendation on FB stock. Evaluating tech stocks? Check out Amigobulls' top technology stock picks, which have beaten the NASDAQ by over 114%.

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