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Facebook has become one of the dominant social media platforms and a favoured investment among investors and traders, but there are signs now that cracks are appearing in the edifice of this technology giant. The big question – should you sell Facebook stock now in favour of the likes of Amazon or Alphabet shares?

One of the first signs of Facebook’s problems has been its inability to engage with the younger demographic. There is a new generation of kids growing up who are simply not using Facebook’s core technology, favouring other platforms. True, Facebook owns some of these – e.g. WhatsApp and Instagram – all of which have become valuable communications tools. But the question is whether the ability of a large company like Facebook to keep control over the social media landscape is sustainable?

Facebook stock punished by poor earnings

The second quarter earnings from Facebook saw its share price punished by 24% as the company missed consensus estimates and fuelled speculation that it had reached its zenith. Numbers of users were down in Europe in particular, possibly as the result of the implementation of the GDPR directive in the EU. Facebook COO Sheryl Sandberg said she thought that GDPR has not had an appreciable impact on Facebook’s operating revenue, but we have yet to see how it will impact Facebook’s Q3 revenues.

What has concerned investors most is the fact that Facebook has missed revenue estimates – $13.04 billion actual versus $13.16 billion estimated by FactSet and StreetAccount. Facebook said it expected that its revenue growth rates this year will be lower than in 2017. Media buyers think this is just a glitch, possibly a consequence of GDPR, and that Facebook will bounce back.

Bad publicity is hurting Facebook stock

Then there are Facebook’s image problems. The company already stands accused of mismanaging the data of users and helping foreign governments to manipulate elections. These are pretty serious allegations which would have sunk a lesser company. It has already admitted it was actively used by Russian actors seeking to influence the outcome of the US presidential election in 2016 and is under investigation by the Department of Justice and the FBI.

The company is responding with a publicity campaign and hiring new staff to help it to police hate speech online. But cyber security experts say that its efforts to combat dubious advertising are half-hearted. For example, its advertising transparency tools are not user-friendly: researchers and journalists say it is hard to properly analyse the data Facebook has made available. The company is also not being fully transparent about how it moderates content and what criteria it uses when it chooses to remove it.

There are also other practices that Facebook could be caught out on in the future, for instance tracking the web activity of users when they are not actually using Facebook. This is something search engine Mozilla has complained about; Mozilla has suspended its advertising campaign on Facebook and has introduced an extension that will block Facebook from tracking users off-platform.

It is going to be very hard for Facebook to regain public trust, when every couple of weeks a new scandal emerges. Facebook has been at pains to tell the public in recent advertising campaigns that it is addressing these issues, but when enquiries are made about just how it is doing this, there is a severe lack of detail.

It is increasingly looking like Facebook will become subject to regulation, something it has lobbied hard against. But given its dominance in the sector and its vulnerabilities to foreign interference, some kind of action from the US government is likely. Senator Mark Warner, who sits on the Senate Intelligence Committee, has already drawn up plans for more regulation of technology companies in the US, and while GDPR is still limited in its scope, the US may well see more privacy legislation passed to protect the rights of individual users.

Such legislation is going to hit a lot more companies in the US – and further afield – than Facebook, and will spell the end of the free-wheeling days of Internet independence.

Time to sell Facebook stock?

Should you sell Facebook stock though? Many investors already have. Revenue growth is clearly decelerating, but the growth rates have been considerably above 40% year on year in recent quarters.

“Chances are that the company will continue to grow at well above 20% in coming quarters, which is still quite a vigorous growth rate for such a massively big corporation,” says Andres Cardenal, a stock market analyst and trader.

It sounds as if Facebook stock is topping out. Income will still be there from the profits of the company, but if you are looking for hot technology growth stocks, there are many better opportunities on the NASDAQ.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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