To trade or not to trade, that is the question
Bluntly put, Facebook's been having a pretty tough time. Despite boasting over 2.27 billion users in the third quarter of 2018, the last 2 years have put a lot of pressure on the company and its stock.
What's it all about?
Several years ago, Facebook was flourishing. Through the collection of large quantities of users' personal information, it allowed advertisers to target users, while the company bathed in ongoing revenue.
Although privacy concerns were raised, they weren't enough to influence the well-oiled social-media giant. However, as U.S. Presidential Elections came by, things took a dramatic turn.
Facebook suddenly became an epitome of "fake news". Among the abuses of its automated systems - according to U.S. intelligence - Russian agents were helping Donald Trump win the election through political havoc.
It was also the case of "ordinary" people from all over the world who made money posting false information in pro-Trump Facebook groups. Fake-news sources paid Facebook to use microtargeting and go after users, who fell for similar ads in the past. Needless to say, the public was outraged.
How it all began
In March 2018, a real disaster struck. The Media reported that a researcher gained access to information of over 87 million Facebook users. This information was then sold to Cambridge Analytica - a consultancy firm, hired by Trump's political party to influence electors' choices.
Although this was the definite end of Cambridge Analytica, Facebook was the main target of public dissatisfaction. The idea of a trusted and secure cyberspace was lost. User boycotts and investor anxiety caused stocks to drop by 11%.
Nevertheless, only 2 months later, Facebook's price bounced back to where it was before the security breach. Between Zuckerberg's testimony, Facebook's positive earnings in April, and the annual developer conference in May, it seemed that all was forgiven, and Facebook had recovered.
Turns out it was all too little too early. The end of July 2018 saw the biggest one-day wipeout in U.S. market history, as at one-point Facebook stock fell 24%. After it restored slightly, it was still a 19% decline, causing Facebook to shed almost $120 billion in market value. What happened there?
Simply put, the company's earnings report missed revenue expectations, showing slowing user-growth on the platform. This, plus Facebook executives' warning that the trend is likely to continue, sent Wall Street into panic.
What now?
July events proved that repercussions on Facebook's behavior are hard to shake. The epicenter of scandal and uncertainty made it seem like an unreliable option to buy. Is that really so? Opinions differ.
Some experts think it could be a good long-term investment:
- The fall in revenue is seen as nothing else but a monetization shift. With increased investment in Facebook security, as the platform is doing its best to erase the mistakes of the past, it's only fair that profits would be lower for a while. This doesn't necessarily mean that revenue won't yield in the long-run.
- When it comes to user growth, the group of traders reminds us that Facebook is not just your average platform. It already reached market saturation in Europe and U.S. with over 2.2 billion users to show for it. Some might expect a slow-down. This, however, hardly changes the bigger picture. With Facebook, Instagram and Whatsapp all being under one umbrella, a user slow-down on Facebook can be more than outbalanced by user growth on the other two. So, is there really a reason for concern?
Others, however, advise against buying:
- They argue that although investments are flowing into Facebook security, the breach problem is far from fixed. After all, the latest hacking issue only happened in September 2018, and it may well be that there is a next breach of security (and customer trust) on the way.
- The costs Facebook encounters are only growing, while revenues remain comparatively low. This factor alone hardly amounts to a safe investment opportunity.
- Truth is, there is no one correct answer. All we can do is abide by our usual trading rules: watch the technical indications and focus on fundamental analysis to guide us to right trading choices, while the future of Facebook remains a mystery for us to uncover.
*Risk Warning: CFDs are complex instruments that come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts, lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
This article was submitted by Stratton Markets
