More Risks Are Already Priced Into Facebook Shares

We are maintaining our $407 Facebook FB fair value estimate; after nearly a 5% decline on Oct. 4, the wide-moat firm is now trading in 4-star territory. The stock has been hit by many negative headlines regarding the firm's policies, in addition to its main properties not working for a few hours. While the stock will likely remain under pressure from negative news (the outage impact will likely be negligible), we think Facebook's network effect remains intact. We remain confident that while the firm's user growth, engagement, and monetization may weaken somewhat, with nearly 3 billion monthly active users worldwide, a reversal of its platforms' flywheel effect remains unlikely. In addition, while some large brands may abandon Facebook, we believe small and midsize businesses will continue to find Facebook's properties one of the most efficient ways to reach consumers. We think the firm will continue to face pressure to more closely manage accounts and user-created content, and generate immediate remedies and long-term solutions for some of the issues that have grabbed headlines since The Wall Street Journal began publishing its reports in mid-September. While the past is not indicative of the future, we note the firm has faced similar issues previously with a negligible long-term impact on user growth, advertiser demand, and overall financial performance. In our view, Instagram's impact on younger girls will likely have the most enduring effect on the firm. Platforms like Instagram, TikTok, and Snap clearly want to increase engagement, which is driven by content that stirs emotions whether positively or negatively. As such, we wouldn't be surprised to see more control over usage enforced by the firm, parents, lawmakers, or all the above. This would likely reduce user growth and engagement, making the Instagram audience less attractive to advertisers. However, this could also be partially offset as some large brands may begin to view Instagram and Facebook as safer.

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