The hits just keep coming for Facebook - here's why things could continue to get worse

The hits just keep coming for Facebook - here's why things could continue to get worse

facebook ceo mark zuckerberg

REUTERS/Leah Milli

Mark Zuckerberg, CEO of Facebook, which has had to contend with a series of scandals and public-relations mishaps this year.

  • Facebook has had to contend with an endless string of scandals and fiascos this year.
  • Those problems are an indication that it has a deeper issue to deal with, said Pivotal Research Group financial analyst Brian Wieser in a new note.
  • The company has underinvested in putting in place the kinds of systems that would prevent such mishaps, Weiser said.
  • That's a good reason to sell the stock, he said.

Facebook's bad year seems to keep getting worse.

Brian Wieser doesn't expect it to improve anytime soon, and thinks that's a good reason to sell the company's stock.

"We continue to see these issues as representative of systemic problems impacting the company," Wieser, a financial analyst who covers Facebook for Pivotal Research Group, said in a research note on Wednesday. He continued: "We're not doubting they [can] be fixed, but the fact that problems keep emerging reinforces our view that the company is not as in control of its business as it needs to be."

Facebook has been pummeled by a seemingly endless string of fiascos, scandals, and public-relations nightmares this year. Just on Wednesday, the Wall Street Journal reported that Facebook has been spotty about taking down pages from fake veterans groups, while USA Today reported that Facebook was removing ads that mentioned African-Americans and other minority groups, citing them as "political," when the ads weren't actually promoting political causes or candidates.


Meanwhile, in the last week, Facebook acknowledged that a security breach was worse than it had disclosed before, at least in terms of the data that was compromised, noted Wieser. It was also hit with a claim that it knowingly defrauded advertisers about the amount of time users were spending watching videos on its site.

Investors should expect more to come, Wieser suggested in his note. Facebook simply hasn't put in place systems that might anticipate problems and correct them before they came to light or caused damage to the company or its users, he said.

"The underlying problem that we see is that the company has been so focused on growth at any cost that it has failed to sufficiently invest in [such] processes," he said.

Facebook's clean-up effort will come at a price

Facebook has started to try to clean up and better police its site. It's tweaked the way its News Feed works to emphasize posts from other users, rather than those from organizations. It's started to label political ads and force the backers of such ads to be identified. And it's in the process of doubling its team of content moderators to 20,000 people.

Those steps are likely going to come with significant costs for the company, Wieser said. Those costs will likely weigh down its future earnings, but still may not be the end of its misery.


"As problems are fixed, costs will rise, possibly faster than the company has anticipated (if only because the company is slow to acknowledge problems requiring fixing)," he said. "And then other problems with more material commercial consequences might still come to light."

But Facebook faces an even bigger threat than having to spend more money to clean up its messes, Wieser said. The growth in the digital advertising market is likely to slow, putting a crimp on it longer term prospects.

In his note, Wieser's reiterated his $131 price target for Facebook's stock. The company's shares closed regular trading Wednesday at $159.42, down 64 cents or 0.4%. The stock is down 10% in the year to date.

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