FB Stock: Don't Sell Facebook Inc Stock, But Do Read This

  • Facebook's 'overstated metrics' won't drive away advertisers, but ad-prices could be impacted.
  • You might not have realized it, but in some cases, the 'overstatement' is as high as 122%.
  • Don't sell FB stock. But, if you own the stock, do spare 5 minutes to read this post.

We all know how Facebook (NASDAQ:FB) has earned itself a tad bit of a trust deficit following the revelation that it had been overstating key metrics. At the outset, let us clarify - we don't think advertisers are going to flee the platform. Neither do we think they're going to take their campaigns elsewhere. Make no mistake, there aren't many alternatives that match Facebook's scale and reach. However, we do think that both, the overstatement itself, and its impact are being underestimated. We're not suggesting you sell FB stock. You might want to tone down your expectations though, and we'll explain why.

The 'Overstatement' Is Actually As High As 122%

A lot of folks have simply brushed aside concerns, branding them as over-reactions. However, if you took a closer look at Facebook's announcement, you might not feel as comfortable. We'll summarize them quickly here:

  • Page Insights - 7-day summaries on reach overstated by 49%, 28-day summaries by 122%. According to FB, these numbers could drop by an additional 20% when based on “viewable impressions”.
  • Video - under-reported the number of full video watches by 35% - Not all miscalculations favor FB - So, that's good news.
  • Instant Articles - Time spend was overstated by 7-8% on average.
  • App referrals - Overstated by 30%, and by 6% for 'power users'.
  • Follow counts - Those who followed someone from a profile AND an 'interest-list' were double counted, roughly to the extent of 5%.

You might be wondering why some of these numbers differ form the ones you saw on the announcement itself, and probably on other reports that analyzed this 'overstatement'. The problem lies in the interpretation of Facebook's statements. Take for instance the 28-day summaries for page reach, which Facebook says "will be 55% lower" on average. Take a base of 100 and reduce that by 55%, and the actual number is 45, which is indeed 55% lower. However, this implies that the overstatement was much higher, at ~122%. This is also the case with 7-day summaries. Where the overstatement is smaller, it has been directly stated in the announcement, which makes it easier to interpret.

Also Read: Is Facebook Stock A Big Short

Coming to the point, these numbers aren't negligible 'glitches' as they've been described by some observers. They're neither sudden not temporary, and in some cases, these errors have gone unnoticed for a fairly long time (over a year). The other common defence has been 'it didn't impact billings'. Not directly maybe, because Facebook uses "a stricter definition" for paid ads reports. However, such massively overstated numbers do present a compelling case for those who are sitting on the sidelines, to consider spending some Dollars on the platform. And it's possible that some of those folks feel less thrilled about that decision now.

How Will This Impact Facebook?

For starters, Facebook has made a great move by bringing in third-party verification in a more pervasive, accessible manner, with help from the likes of Nielsen, comScore, Moat and Integral Ad Science. It has also said it will "form a measurement council of ad agency executives and marketers to develop metrics suited to the needs of advertisers.". Thankfully, Facebook isn't taking this as lightly as those who have simply dismissed the need to be concerned. Like we said earlier in the post, we don't think advertisers are going to flee Facebook or take their campaigns elsewhere. But that's because they don't have too many alternatives. Barring Google, there aren't too many platforms out there which can match the scale or reach that Facebook wields. (Also Read: Is FB Stock Set For A Big Rally?)

However, Motley Fool's Adam Levy raises some important concerns. Facebook has 4 million advertisers, and a good number of them are small businesses, who can't afford measurement tools. He goes on to add:

"While Facebook has taken steps to integrate with third-party measurement tools, and is looking to add more in the future, those tools are inaccessible for smaller businesses with limited budgets. While none of them individually spend a lot of money on Facebook ads, don't underestimate the aggregate value of the long tail of small advertisers to Facebook."

And While a recent post on TheStreet.com concludes that the recent fiasco won't impact Facebook, it also highlights some concerns:

"They're happy with the results but again when you look at pricing in this whole digital space, the lack of clarity and integrity around what I'm paying for versus the results that I'm achieving, it's a grey area. It's fuzzy."

We don't want to exaggerate the risks, but we don't want to dismiss them either. And while advertisers may not take their ad-campaigns elsewhere, at least some of them might press for lower ad-prices, as this article on Barron's suggests:

"Our initial reaction to the measurement news was that advertisers and publishers were unlikely to meaningfully alter their working relationships with Facebook as a result of this news by itself. While we have heard from some agency executives for whom this is true, from others we have heard that there will be significant efforts to secure concessions from Facebook, possibly resulting in reduced spending or more costs for Facebook."

Summing It Up

As fellow writer Alex Cho put it, this is not one of those 'the sky is falling' moments for Facebook. Nor is it going to dent FB stock heavily as things stand currently. That said, the overstatement is massive, and it might not be prudent to completely dismiss relevant concerns, until Facebook proves otherwise. We're not suggesting that you sell FB stock. However, you might want to tone down your expectations.

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Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and FB stock

user profile picture
Very interesting post Vikram. A unique perspective for sure.

However, what might be a saving grace for Facebook is that the overstatement in reach was limited to organic reach and not to paid reach. This might be something which might comfort advertisers. Else, this could have quickly boiled into a negative financial impact for FB, IMO.
user profile picture
FB is collecting massive amounts of data relating to ad dollars spent and the impressions of those ads. There are so many variables in place with 1.79 billion DAUs, that FB is continually discovering side effects of their measurement systems. They act quickly to correct the unintended errors, but more will happen. They are measuring enormous amounts of data, and problem solving that data is a constant issue. Other companies would love to have this issue of 1.79 billion customers.
2 reply
Do share this awesome post