Facebook Inc. (Nasdaq: FB) absolutely crushed on earnings for the third quarter on Tuesday.
Indeed, the social network leader posted earnings per share ($1.76) that were more than 20% higher than Wall Street’s forecasts.
At first glance, the report seems like very good news for a company that has found itself the target of growing criticism about data intrusions and the misuse of its platform during elections.
And while I’m happy to see that earnings are on the upswing, they do nothing to convince me that Facebook is no longer a troubled firm.
I don’t come to this conclusion lightly.
I have been a huge Facebook bull for the last five years. I staunchly defended the company when it came under criticism from the U.S. Senate last spring… and when it became the butt of jokes on late night TV several years ago.
However, the company is now facing a host of challenges at a time when the stock has clearly entered bear territory.
With that in mind, I want to walk you through those challenges.
Plus, I’ll show you whether I have Facebook listed as a buy, sell, or hold.
Facebook’s Baggage Buildup
Just hours before Facebook released its earnings, I appeared as a guest on Cavuto: Coast to Coast on Fox Business.
I told interviewer Connell McShane my concern went beyond a single quarter. Then I predicted the company would offer mixed results.
And that’s exactly how things played out – Facebook beat on earnings and slightly missed on sales.
I’m not worried that the 33% sales increase was below forecasts and the weakest in four years. At some point, the firm’s amazing growth over the last several years has to level off.
It all boils down to this: The company is clearly at a turning point, and CEO Mark Zuckerberg has not yet articulated a clear vision of what he’s doing to get the company firing on all cylinders again.
Bear in mind, I have gone out on a limb twice before to offer a spirited defense of Zuckerberg, a leader who truly has transformed the way friends and family keep in touch and how companies reach new customers.
The first time occurred back in March 2014. At the time, Zuckerberg had become a laughingstock on late-night TV after paying $19 billion for WhatsApp. The 5-year-old startup, at the time, had just $20 million in sales and a mere 55 employees.
And when we talked about Facebook in May, I applauded Zuckerberg and re-recommended the stock. The CEO had just done a great job of defending Facebook during two days of hearings on Capitol Hill.
Zuckerberg found himself in hot water because Facebook had sold user data to Cambridge Analytica, a British concern that accessed information on up to 87 million users of the social-media network without their consent.
In turn, Cambridge supplied information that Donald Trump’s presidential campaign relied on for targeted marketing during the 2016 election.
Zuckerberg “managed to run rings around some of the nation’s more powerful politicians – but still come across as humble and polite,” I observed. “For the most part, he also was forthright in his answers.”
Here’s the thing. Cambridge Analytica was not Facebook’s only recent scandal involving user data and privacy.
And it won’t be the last…
Facebook’s Privacy Problems
Just look at what happened in late September when Facebook disclosed that attackers accessed 50 million accounts that month.
Company executives said that any potentially compromised accounts had been logged out of the service as an investigation unfolded. Without offering proof, they stressed that no user credit card data had been compromised.
Less certain is the privacy issue – did hackers gain access to private messages that might be embarrassing if disclosed?
All of this is occurring at the same time the company once again is under intense criticism about its use as a political platform. Critics charge that Facebook is being easily manipulated to disseminate false information by and about conservatives and liberals alike.
Just weeks ago, Facebook removed more than 800 U.S. publishers and accounts for delivering a flood of political messages the company says violated spam policies.
We’re talking accounts like those for both Right Wing News and leftist outfits like The Resistance and Reverb Press. Facebook says the sites were removed not for content but violations of behavior.
In reality, however, there’s no way for us to know just how Facebook decided which political accounts to remove, let alone assure us that misuse won’t occur in the future.
Then there’s Instagram…
Facebook’s Uncertain Future
I’m concerned that the founders of the photo-centric social media service recently left the firm. Instagram has well over 1 billion users and is a go-to social-media platform for young people, a very desirable demographic for advertisers.
Because advertising is by far the biggest driver of Facebook revenues, this is no small matter. Of course, right now we don’t know if the Instagram crew departed because Facebook was too big for their entrepreneurial spirits… or if there’s more to it.
My concern here is that Facebook may be mulling changes to the platform. Reports are that Zuckerberg has demanded and received much more control over Instagram.
Should Facebook change the photo-sharing service, it could be a huge and costly mistake. And I have empirical evidence to back up that claim.
Earlier this year, Snap Inc. (Nasdaq: SNAP) unveiled a redesign that was an instant disaster, outraging at least 1 million users and contributing to a sharp sales decline.
And let’s not forget that Facebook’s stock is down more than 30% since July 25 after a disappointing second-quarter report that included downbeat sales guidance for the rest of this year.
Of course, there’s no doubt that Facebook remains a formidable tech presence. It still boasts one of the great global franchises out there.
At the end of the third quarter, it had 2.27 billion active monthly users, a figure that missed Wall Street estimates but that was up 10% from a year ago.
But at this point, I simply cannot recommend this choppy, news-driven stock.
Yes, I’m aware that it could bounce back from here. However, with the stock so weak, any adverse news could hurt investors even more.
So, while I’m not suggesting that those in it for the long haul sell now, I would advise average retail investors looking to pick up Facebook at a huge discount to keep on shopping for less controversial deals.
A Red-Hot Opportunity
Now, Facebook may be cooling off for the time being as it faces a slew of hits to its reputation and near-term outlook, there’s another industry that’s on a roll lately.
2018 has been an absolutely historical year for cannabis stocks, and it all comes down to the legalization wave that’s sweeping the country.
Thirty states have already legalized cannabis for medical use… nine of those states also have legalized cannabis for recreational use… and pro-cannabis legislation has been passed in 49 out of 50 states.
And come Election Day, you’ll have the chance to see firsthand how revolutions like this lead to life-changing paydays.
It’s all happening in a matter of days – so you better move fast.
Click here to see what I’m talking about….
Have a great weekend. I’ll see you back here next week.