Facebook (META 1.54%) has loomed large in the headlines for all the wrong reasons over the past few weeks. In mid-September, The Wall Street Journal started publishing a series of investigative articles called "The Facebook Files" which criticized the social media giant for its business practices.
Those reports coincided with the abrupt announcement that Facebook's chief technology officer, Mike Schroepfer, who had held the role for 13 years, would resign next year. Schroepfer will be succeeded by Andrew Bosworth, who currently leads Facebook's hardware division.
Bosworth's appointment raised even more red flags after an an internal memo from 2016 resurfaced. In that memo, Bosworth declared Facebook should still connect people even if "someone dies in a terrorist attack coordinated on our tools" or "costs a life by exposing someone to bullies."
Image source: Facebook.
In early October, Frances Haugen, a former data scientist and product manager at Facebook, revealed herself in a 60 Minutes interview as the whistleblower who had provided the internal documents to The Wall Street Journal. Those reports sparked a new Senate Commerce subcommittee hearing, which started on Sept. 30 and led to Haugen's testimony on Oct. 5.
On Oct. 4, Facebook, Instagram, WhatsApp, and Oculus all went offline for more than six hours in the company's worst service outage ever. That ceaseless streak of bad news, along with the broader sell-off in tech stocks, caused Facebook's stock to decline about 12% over the past month.
But will any of these controversies actually curb Facebook's long-term growth? Or have they merely created another buying opportunity for investors who still believe in Facebook's vision for the future?
The key takeaways from "The Facebook Files"
The Wall Street Journal claims Facebook uses a system called "XCheck" to shield millions of its VIP users from its normal enforcement rules, that it turned a blind eye to how "toxic" Instagram was for teen girls, and an algorithm change in 2018 -- which was aimed at boosting its users' engagement rates -- caused its audience to engage in more heated conflicts instead.
The report also claims Facebook failed to crack down on posts for illegal activities even after they were flagged by its own employees, that misinformation on its platform prevented many Americans from getting vaccinated, and that it had been trying to reach tween users long before its recent development of Instagram Kids -- which was paused in late September as the "Facebook Files" crisis escalated.
During the 60 Minutes interview, Haugen declared that whenever Facebook was faced with a conflict of interest between "what was good for the public and what was good for Facebook," it repeatedly "chose to optimize for its own interests, like making more money."
More support for actions against Facebook
On their own, "The Facebook Files" and the Senate hearing probably won't derail the tech giant's growth. However, they could provide fresh support for the Federal Trade Commission's (FTC) crusade to break up the company, as well as Apple's (AAPL -0.57%) escalating attack on Facebook's data-mining practices.
The FTC initially sued Facebook last December, claiming its acquisitions of Instagram and WhatsApp were anticompetitive. That lawsuit was dismissed in June, but the FTC filed an amended lawsuit against Facebook in August, which is still pushing it to divest Instagram and WhatsApp.
Facebook asked the court to dismiss the new lawsuit in early October, but the "Facebook Files" controversy could tilt the scales in the FTC's favor. It could also fuel more support for Apple's recent privacy update for iOS, which enables users to opt out of data-tracking features for all apps.
Last quarter, Facebook warned that Apple's iOS update would likely impact its growth in the second half of the year. Analysts still expect Facebook's revenue to rise 39% this year, thanks to an easy comparison to the pandemic's initial impact last year, but grow just 20% next year as it faces more regulatory and platform-related headwinds.
Why Facebook will weather the incoming storm
Facebook is being hit with a barrage of negative headlines, but investors should remember it previously weathered a lot of scandals -- including the Cambridge Analytica scandal, issues pertaining to the Myanmar genocide, and the Jan. 6 attack on the U.S. Capitol. Each time, critics called on people to boycott Facebook.
But Facebook continues to grow, and 3.51 billion people now use its family of apps (Facebook, Messenger, Instagram, and WhatsApp) each month. Even if the FTC successfully broke Facebook up into several smaller companies, its investors would still likely receive new shares of Instagram and WhatsApp -- which could generate much bigger gains than Facebook's core business.
Therefore, I believe Facebook will continue to expand, and the recent controversies won't meaningfully throttle its growth -- especially in overseas markets that aren't following the "Facebook Files" story.
If you have moral objections to Facebook's business practices, don't buy its stock. But if you believe it's just experiencing painful growing pains, its stock still looks like a bargain at 23 times forward earnings.
