#SocialStocks: Facebook Gets Backlash on Multiple Fronts, Competitors Capitalize

Facebook’s heavy scrutiny causes company slow down, FIVE9 merger with Zoom terminated and other notable stories from this week. Welcome to “#SocialStocks,” The Fly’s weekly recap of Wall Street’s reactions to social media stock news.

FACEBOOK MIRED IN CONTROVERSY: 

Facebook (FB) is slowing new products for “reputational reviews” to examine how it may be criticized and to ensure products don’t adversely impact children, The Wall Street Journal’s Emily Glazer and Deepa Seetharaman reported. Executives have also put a hold on some work on existing products, according to the report. This comes during the same week as the hearing with a whistleblower and a large scale outage on the platform. Frances Haugen, a former Facebook employee revealed herself on Sunday as the whistleblower who leaked a trove of internal company research that served as the basis of a Wall Street Journal investigative series, Reuters’ Sheila Dang reported. The  Senate hearing brought a new wave of criticism over the negative impact of the social media giant’s apps. Haugen appeared on Sunday on the television program “60 Minutes” and testified before a Senate subcommittee on Tuesday in a hearing titled “Protecting Kids Online,” about the company’s research into Instagram’s effect on the mental health of young users. Facebook shares began September at an all-time high. The company, and stock, have faced a rough stretch since, Max Cherney wrote in this week’s edition of Barron’s. Facebook now exists in permanent controversy. Yet the stock over a longer period continues to outperform, the author noted. Yesterday, Facebook went public with a response. Lena Pietsch, director of policy communications at Facebook, commented in a statement that: “Today, a Senate Commerce subcommittee held a hearing with a former product manager at Facebook who worked for the company for less than two years, had no direct reports, never attended a decision-point meeting with C-level executives – and testified more than six times to not working on the subject matter in question. We don’t agree with her characterization of the many issues she testified about. Despite all this, we agree on one thing; it’s time to begin to create standard rules for the internet. It’s been 25 years since the rules for the internet have been updated, and instead of expecting the industry to make societal decisions that belong to legislators, it’s time for Congress to act.”

However, on Monday, Barron’s noted in an updated report that damaging headlines surrounding Facebook‘s business may finally be having an effect on the company’s stock. Shares were down nearly 5%. In terms of a response from the company, emergency meetings are continuing inside Facebook amid the recent the Wall Street Journal expose on Instagram and teenagers, as some research staff decry Facebook’s public response in group chats, The New York Times’ Mike Isaac, Sheera Frenkel and Ryan Mac reported. According to people with knowledge of the meetings, CEO Mark Zuckerberg and COO Sheryl Sandberg have approved decisions on how to respond but have deliberately kept out of the public eye, and the company has leaned on its “Strategic Response” teams, which include communications and public relations employees. WSJ said the whistleblower’s motive at the company was Haugen’s goal was to help prompt change at the company, not harm it. Haugen, a former product manager hired to help protect against election interference on Facebook, said she had grown frustrated by what she saw as the company’s lack of openness about its platforms’ potential for harm and unwillingness to address its flaws. On the platform outage side, the social media giant cited the six-hour dark period as a result of DNS routing issues. U.S. Representative Alexandria Ocasio-Cortez, a Democrat from New York, tweeted: “If Facebook’s monopolistic behavior was checked back when it should’ve been (perhaps around the time it started acquiring competitors like Instagram), the continents of people who depend on WhatsApp & IG for either communication or commerce would be fine right now. Break them up.” The legal response consisted of Facebook asking a judge to throw out the U.S. government’s revised antitrust litigation that aims to force the company to sell Instagram and WhatsApp after he dismissed an earlier version this past summer, Reuters’ Shepardson reported. The social media giant said in a court filing that the FTC did not provide “plausible factual basis for branding Facebook an unlawful monopolist,” with the company claiming that it appears the commission “had no basis for its naked allegation that Facebook has or had a monopoly,” the author notes. Facebook and most of its apps including Instagram, WhatsApp, Facebook Messenger and Oculus “went down” simultaneously on Monday, knocking out “a vital communications platform used by more than three billion people,” wrote Mike Isaac and Sheera Frenkel of the New York Times. While Facebook obtained the lion’s share of the backlash, Twitter (TWTR) faced its own platform issues, according to Down Detector. While the company’s services have remained largely up, Facebook CTO said it will be some time until the company is 100% operational. 

One group less outraged then most was the company’s social media competition. Snap (SNAP) saw a 23% rise in Android users over the previous week, Telegram rose 18%, Signal rose 15%, and Twitter rose 11%, Bloomberg’s Vlad Savov reported, citing data from Sensor Tower.

Coincidentally, Piper Sandler’s semi-annual survey of 10,000 U.S. teens came out yesterday. The survey showed that Snap remains the favored name in social media, analyst Thomas Champion told investors in a research note. Netflix (NFLX) and Alphabet’s (GOOGL) YouTube retain leadership in streaming and Amazon.com (AMZN) remains the dominant retailer, but is also seeing some pockets of competition, said the analyst. Champion points out that in this fall’s survey, the trio of most used social apps remained unchanged with Instagram / Snapchat / TikTok highest at 81% / 77% / 73%, respectively. Snapchat remained the favorite app among teens at 35%, up from 31% in the spring, he adds. Among upper income teens, Amazon was the favorite e-commerce channel with 52% of respondents, down from 56% last spring. The decline was most pronounced among women, as 39% said Amazon was their favorite online retailer, down from 47%, according to Champion.

FIVE9 STOCKHOLDERS NOT ON BOARD WITH ZOOM DEAL: 

After the market closed on Thursday, Zoom Video (ZM) announced that Zoom and Five9 (FIVN) have mutually terminated the merger agreement executed by the parties on July 16. At Five9’s special meeting of stockholders held on September 30, Five9 did not obtain the requisite stockholder support for the merger agreement. As a result, Zoom and Five9 each had the ability to terminate the merger agreement. “While we were excited about the benefits this transaction would bring to both Zoom and Five9 stakeholders, including the long-term potential for both sets of shareholders, financial discipline is foundational to our strategy,” said Eric Yuan, CEO and Founder of Zoom. “The contact center market remains a strategic priority for Zoom, and we are confident in our ability to capture its growth potential. At Zoomtopia, we announced the Zoom Video Engagement Center, our cloud-based contact center solution, which will launch in early 2022. Video Engagement Center will be a flexible, easy-to-use solution that connects businesses and their customers. We are building this new solution with the same scalability and trusted architecture that has made Zoom the platform of choice for businesses around the world. We also plan to maintain our valued existing contact center partnerships with companies like Five9, Genesys, NICE inContact, Talkdesk, and Twilio. We remain focused on driving long-term value creation for Zoom shareholders and delivering happiness to our customers through our broad-based communications platform including unified communications, developer, and events solutions.” In an interview on CNBC’s Mad Money, Rowan Trollope said Zoom has been a friend and a great partner and the two companies will continue to work together. “We were never selling our company. Our focus has been on execution since day one,” he noted. Five9 has added a record number of new employees since the potential merger was announced, Trollope noted. From an analyst and investor perspective, signals on the two companies were mixed. Canaccord Genuity analyst David Hynes upgraded Five9 to Buy from Hold, following the termination with Zoom. Five9 presents an opportunity for Five9 shareholders, as the implied post-announcement value of Five9 is below its intrinsic value, Hynes told investors in a research note. The company posted “strong” Q2 results and it reportedly had another interested buyer prior to when the Zoom deal was announced, “which should notionally put a floor on valuation,” said the analyst. Hynes continues to believe Five9’s fundamentals “remain strong. Digital transformation tailwinds, continued product innovation, large customer momentum and a still underpenetrated total addressable market should all contribute to sustainable 30%-plus revenue growth going forward, Hynes contends. ON the other hand, shares trended down as much as 3%. ON the Zoom side, Cathie Wood’s ARK Investment bought 114.5K shares of Zoom Video on Monday. Separately, Wood’s firm bought 167K shares of Twitter on he same day.

GIANTS FACE DIFFERENT RESULT ABROAD: 

Nigeria President Muhammadu Buhari said that the ban on Twitter will be lifted, but only if the company meets certain conditions, including paying taxes and setting up a local office, TechCrunch’s Tage Kene-Okafor reported. “Following the extensive engagements, the issues are being addressed and I have directed that the suspension be lifted but only if the conditions are met to allow our citizens to continue the use of the platform for business and positive engagements,” he said. On the opposite end if the spectrum, Russian authorities warned Facebook on Thursday that the company faces a fine of up to 10% of its annual turnover if it does not delete content Moscow deems illegal, Gleb Stolyarov and Alexander Marrow of Reuters wrote. State communications regulator Roskomnadzor told Reuters it intends to send Facebook’s representatives in Russia an official notification, which could lead to a fine of 5% to 10% of Facebook’s annual turnover in Russian if the situation is not fixed. According to Vedomosti, a newspaper published in Moscow, Facebook’s violations include failing to delete posts that include child pornography, drug abuse, and extremist content.

BEFORE THE FAN HIT: 

On Thursday afternoon, RBC Capital analyst Brad Erickson initiated coverage of Facebook with an Outperform rating. In a note partially titled “There’s Just Nothing Else Quite Like It,” Erickson said the next leg of growth depends on the company’s ability to deepen its relationship with its nearly 3 billion users. He thinks the company is well positioned to “transition from a social-centric platform to a fuller source of online utility” through multiple product initiatives, he said. His channel checks have found little fundamental impact from recent IDFA changes, Erickson added. Erickson initiated coverage of Snap with an Outperform rating. He sees Snap having “all the trimmings of a strong social media business narrative,” given its secularly growing ad market, evolving direct response offering, and new products.

—

Originally Posted on October 6, 2021 – #SocialStocks: Facebook Gets Backlash on Multiple Fronts, Competitors Capitalize