Zuckerberg's control of Facebook may be a threat to the value of the stock, Macquarie says
- "Zuckerberg controls the vote and the company. If he wants to change something, he can, even if it negatively impacts near-term financial results," two Macquarie analysts say.
- "As financial analysts, we tend to get a bit concerned when we see vote-controlling CEOs defining what is meaningful and interactive," they told clients.
- They rate the stock "outperform."
- But their critique is a reminder that Zuckerberg has a lot of power, and he makes mistakes.
Mark Zuckerberg's control of a majority of Facebook's stock - which gives him absolute power over the company even though it is publicly traded - could damage the value of those shares, according to Macquarie Capital analysts Benjamin Schachter and Ed Alter.
They voiced their opinion after Zuckerberg announced that the priorities of the News Feed in Facebook would change, based on how "trustworthy" users believe those sources are.
"The changes announced by FB should remind investors that Zuckerberg controls the vote and the company. If he wants to change something, he can, even if it negatively impacts near-term financial results," the pair told clients on January 17, in a note seen by Business Insider.
"It is concerning to us that Zuckerberg's focus is defined by 'meaningful social interactions' that are more interactive and less passive. There is much to admire in this focus, but as financial analysts, we tend to get a bit concerned when we see vote-controlling CEOs defining what is meaningful and interactive," Schacter and Alter said. It is relatively rare for equity analysts to criticise Zuckerberg, given the stock's meteoric rise.
In one sense, they are merely restating the obvious: Zuckerberg has long retained majority control of the stock, and has litigated and maneuvered to maintain that control even as he spends less time running the company on a day-to-day basis. So the note isn't a huge surprise.
But it is also a restatement of the fact that under Zuckerberg, Facebook has made mistakes. Most recently, in late 2016, Zuckerberg dismissed as "crazy" the idea that fake news propagated by Russian agents could have had an impact on the US presidential election that year. More recently, however, Facebook has admitted that 126 million people saw paid Russian propaganda on the social network before the election.
This latest announcement by Zuckerberg is an attempt to course-correct for the apparent ease with which disreputable media publishers can game the News Feed algorithm, and drive up bogus news inside your Facebook account.
Zuckerberg has long been obsessed with news inside Facebook. In 2013, he announced a redesign of the News Feed by saying, "What we're trying to do is give everyone in the world the best personalized newspaper we can." He encapsulated that vision with an illustration of a mock local newspaper called the Monterey Times. In 2014, he tried again, launching a news-only app called Paper.
The Macquarie analysts - who rate FB as "outperform" - wrote:
"Again, we admire much of what he is doing, but from a purely near-term financial view, the headlines of the past year regarding social media's influence on society increases non-financial risks for FB, and these moves by Zuckerberg highlight that risk."
"... Zuckerberg plainly stated he expects time spent and some measurements of engagement will go down, but believes the changes will be good for the community and the business over the long-term."
"... It's Zuck's world, we all just post in it - This is also a casual reminder that when it comes to sweeping changes on Facebook, Mark Zuckerberg is realistically the only one with a say in the matter. As of FB's most recent proxy statement last year, Zuckerberg holds 59.7% of the voting power in the company. Investors with a differing opinion have little recourse. GOOGL has a somewhat similar situation with Larry Page and Sergey Brin holding 51.1% of the vote, as well as Eric Schmidt with another 5.6%. However, the same isn't true across all large cap tech and social media, with none of the executives at AAPL, AMZN, or TWTR having full control of the vote. While we think that this change at Facebook is unlikely to stir much serious debate on the matter, it does serve as a reminder of the reality of the situation."
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