Facebook Inc Stock Is For Passive Investors Only

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When it comes to Facebook Inc (NASDAQ:FB) CEO Mark Zuckerberg, many advisors and investors just can’t get enough. He’s the voice of the Millennial generation in more ways than one, and many people respect his views and plans for the company he founded. However, one analyst has a very interesting reminder for Facebook stock as it relates to Zuckerberg and the News Feed overhaul announced last week.

And as he makes changes to the platform’s News Feed to increase engagement, investors who don’t like the expected negative impact those changes could have on the company’s finances should be reminded that they own Facebook stock as a passive investor. They don’t get a vote in anything that happens at the company—even on the proxy ballots—because Zuckerberg has a controlling interest.


Not a new concern for Facebook stock

Macquarie analyst Benjammin Schachter said in a note to investors this week that the News Feed changes Zuckerberg announced should serve as a reminder that he has total control over the company. He can make any changes he wants, even if they will have a negative impact on the firm’s financial results. Schachter does feel that in the long term, the changes are probably needed and will eventually have positive results, but things could get rough in the near term.

However, he also finds it “concerning” that Zuckerberg has set his focus on what he deems “meaningful social interactions,” which Schachter describes as “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,” Schachter wrote.

He maintains his Outperform rating and $205 price target on Facebook stock, but he had important reminders about the lack of corporate governance at the company—something that would raise some serious flags if we were talking about almost any other company besides Facebook.

“When it comes to sweeping changes on Facebook, Mark Zuckerberg has the final say in the matter,” he wrote. “As of FB’s most recent proxy statement. Zuckerberg holds 59.7% of the voting power. Investors with a differing opinion have little recourse.”

Nothing new in the changes either

He added that the headlines on “social media’s influence on society” that have been growing over the last year are increasing the social media firm’s non-financial risks, and the News Feed changes Zuckerberg is making “highlight that risk.” Further, he pointed out that this isn’t the first time Facebook has said that it plans to give more weight to content from family and friends “at the expense of business pages.”

He said similar comments were made in April 2015 and June 2016. However, he warned that the most recent commentary may be more significant because of everything that’s happened in social media, such as the alleged Russian meddling in the 2016 presidential election.

Facebook management said that time spent and engagement on the platform may go down in the short term, but it’s still unclear what kind of financial impact the changes will have. He noted that last year impression growth fell from 49% in the fourth quarter of 2016 to 10% in the third quarter of 2017 as ad load growth slowed. However, there was no real negative financial impact because the price per ad grew 35% by the end of that period, while it was growing at only 3% in the fourth quarter of 2016.

Upside possible for Facebook’s Watch tab

The latest data from third-party ad agency Kenshoo offers a clue as to why investors are willing to overlook corporate governance issues when it comes to Facebook stock. Social spending on Facebook and Instagram grew 39% and 38%, respectively, year over year. Kenshoo also reported that one-quarter of social ad spend is now videos, and video ad spend grew 93% year over year.

Schachter said one upside from the News Feed changes is that they could result in more differentiation for Facebook’s Watch video tab, which has yet to really catch on. He noted that most of the video is consumed in the News Feed, but this year the company is expected to ramp up content on the Watch tab.

In fact, the company has already begun working on differentiating the video tab from the regular News Feed by starting to test Watch Party, a new feature that allows users to watch the same videos at the same time while interacting with each other. It’s unclear whether that feature is even practical, but if it never moves past testing, then we’ll know that it just didn’t work out.

Facebook stock rallied on Thursday, climbing by as much as 1.45% to $180.18 in intraday trading. However, Facebook stock has yet to regain the heights it was at before the News Feed changes were announced.

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