Facebook Inc (FB) Stock Is Losing a War With Itself

Facebook Inc (FB) Stock Is Losing a War With Itself

Facebook is facing issues of prior restraint it can't solve and that won't scale. That's the true danger to FB stock.

By Dana Blankenhorn, InvestorPlace Contributor  |  May 8, 2017, 9:43 am EDT

Source: Shutterstock

While most analysts remain bullish on Facebook Inc (NASDAQ:FB), the company faces a war with itself — and its own users — that it seems incapable of winning. Thus, FB stock, which seems almost invincible, might be more vulnerable long-term than most people might want to admit to themselves.

Source: The Crunchies! via Flickr

People using the social network to lie, to steal and to dramatize death are far ahead of the site’s ability to police itself. The company is hiring 3,000 people to stop harmful content and is tweaking its algorithms, but it remains behind the curve.

So far this has only resulted in Facebook stock taking a pause, and 80% of analysts still say buy, buy, buy. Despite beating earnings estimates last week, however, FB shares fell $2 on May 4, and have since failed to recover the lost ground. The stock opened for trade May 8 at $150.50.

By some measures, FB stock is a bargain now. The company’s historically high price-to-earnings ratio is down to 37, and Facebook continues to bring in more than $1 of net income for every $3 in revenue. Facebook has no debt and generates $16 billion of operating cash flow per year on a market cap of $433 billion.

So why the worry?

The Facebook Backlash

“News is what somebody somewhere wants to suppress,” wrote Daily Mail Founder Lord Northcilffe. But it turns out this is not an either-or. There is a line even the staunchest advocates of free speech will say should not be crossed, but the nature of Internet technology keeps any line from being drawn.

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When activists like Jesse Jackson demand prior restraint to keep Facebook Live from showing murders and suicides, they are also demanding the tools that let leaders of oppressive regimes prevent their critics from using the service. This is the price Vietnam — and by extension, China — are demanding FB pay for entry into their markets, that critics of their governments not be heard.

New Yorker headlines like Facebook and the Murderer and The Failure of Facebook Democracy, however, show that these demands are no longer just those of dictators, but of mainstream democracy as well.

English police now trace one-third of all cyber-bullying incidents, 6,300 last year, to Facebook. Nearly half of USA Today’s own “likes” turn out to be from phony accounts.

What Facebook faces is the task of separating freedom from liberty. Freedom shouts fire in a crowded theater. Liberty demands governance, which makes Facebook a government, which puts it in competition with other governments … but also means those governments can dictate their own policies to it.

Right now, however, FB stock is in trouble because Facebook lacks the capability to engage in prior restraint. Prior restraint doesn’t scale, and the issue is one for lawyers, not for programmers. The company is trying to find out how people feel, but that is just a first step.