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Facebook Whistleblower: Time to Sell the Stock?

By Jeremy Bowman – Oct 12, 2021 at 6:10AM

Key Points

  • Whistleblower Frances Haugen slammed the company in her testimony to Congress.
  • Social media regulation is now more likely, and Facebook's reputation is on the ropes.
  • The stock is still too cheap given that Facebook has endured these crises before.

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A former employee urged Congress to step up oversight of the company. Is the social media empire unraveling?

Score another win for the Facebook (META 0.49%) haters. The company was put on the defensive once again last week when whistleblower Frances Haugen, a former product manager at the company, testified to Congress. She shared internal reports that the company found that Instagram could encourage body image problems in teen girls, alleged that Facebook's cyber espionage investigative unit was significantly understaffed, and said the company consistently prioritizes profits over people by promoting potentially harmful content.

The criticism dovetails with a broader theme that has crystallized in some intellectual circles: Facebook is bad, period. In combination with a massive outage that took Facebook, Instagram, and WhatsApp offline on Monday, the news sent the stock down 5% that day, a response to 60 Minutes airing an interview with Haugen on Sunday Night.

Facebook CEO Mark Zuckerberg speaking at a conference.

Image source: Facebook

CEO Mark Zuckerberg took to defend the company in a lengthy post, beating back the idea that the company puts profits over safety and well-being. The Facebook chief said the company has deliberately taken action to move engagement away from things like viral videos and toward connecting with friends and family, the company's core mission. Zuckerberg also, once again, called on Congress to act in regulating social media and internet usage, especially for use by kids and teens.

Before we explore the question of whether it's time to sell Facebook, let's take a look at what the direct effect from Haugen's testimony will be.

Regulation will eventually come

Regulation is likely to come to social media, and it should. After all, other forms of media have rules and restrictions in many of the ways Zuckerberg is asking for. Children under 17 can't see an R-rated movie without an adult, and TV shows and video games come with warnings of explicit content, as did music in the analog days. You can't use profanity or show nudity on TV or the radio, either. If these rules exist for traditional media, then there should be some equivalent for social media. The issue is that it's much harder to do this with social media because there's so much more content, and much of it is seen by only a few people.

Zuckerberg has been calling for just this kind of regulation for years, and Congress should act, especially if they agree with Haugen's testimony. But I think the CEO is also right -- that it's unrealistic for Facebook to police itself when lawmakers haven't made the rules of engagement clear, and it's unfair to expect the company to spend possibly billions in policing itself and improving the safety of the platform when competitors like Twitter, YouTube, and Snap don't have to spend anything. That Facebook even needs a cyber espionage unit shows that the government should be more closely involved with it. 

Social media regulations would likely benefit Facebook by establishing the boundaries on the playing field and removing at least some of the burden of the company having to defending itself every time these critiques arise.

Facebook's reputation is a vulnerability

Events like Haugen's also hurt the company's reputation. That's a risk because it damages the company's brand with another important audience: current and prospective employees. Zuckerberg's post was a copy of the missive he sent to all Facebook employees; and shoring up morale when incidents like this happen has become a recurring demand of his job. Facebook's also seeing a declining usage among people under 24, and while that's more about competition and demographics than higher-level political debates, having a bad reputation can only make that problem worse. Finally, it also hurts Facebook stock, which has consistently traded at a discount to its fundamentals and growth prospects, in part because investors fear a breakup or even an exodus in its user base.

The Facebook thumbs-up on a sign at company headquarters.

Image source: Facebook

But there's good news

All that may be true, but the vast majority of Facebook users probably won't care about Haugen's comments. In fact, most of them probably won't even know about them. After all, most of Facebook's users don't speak English and haven't been keeping up with the U.S. Congress. Most of Facebook's users have demonstrated time and again that Facebook provides real value to them -- whether that's as entertainment, a way to connect with friends and family, or as a platform to speak their mind -- and that they will continue to use it regardless of the broader cultural discourse around the company. The more than 7 million businesses that advertise on Facebook feel the same way. The value that the company adds is greater than whatever the broader social costs of using the platform might be.

We know that because Facebook has been tested time and again by crises like Russia hacking the 2016 election, the Cambridge Analytica scandal, and the Stop Hate for Profit boycott that emerged after the murder of George Floyd. Every time, the company has emerged virtually unscathed.

No reason to sell

The risks to Facebook always seem exaggerated next to its benefits. Ultimately, the company provides real value to its users. Otherwise, they wouldn't use it. Zuckerberg closed a recent post by saying, "When I reflect on our work, I think about the real impact we have on the world -- the people who can now stay in touch with their loved ones, create opportunities to support themselves, and find community. This is why billions of people love our products." Billions of people. Only a few companies in the world can make that claim.

The reality is that the media narrative belies what's happening in the real world, where most of the 3 billion people who use Facebook are making a rational choice to do so because, on balance, it's a positive force in their lives. That distortion and the surrounding fears of regulation have led to a mispricing of Facebook's stock, and explains why it's consistently so cheap. On a price-to-earnings (P/E) basis, it's less expensive than all of its FAANG peers, even though it's growing faster than most of them.

The stock has already recouped some of its losses from Monday, but any continued weakness due to Haugen's testimony looks like a great opportunity to scoop up some shares.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon, Facebook, and Snap Inc. The Motley Fool owns shares of and recommends Amazon, Facebook, and Twitter. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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