fbpx

Facebook: An "appealing risk-reward" opportunity?

After Facebook's stock dropped, many investors lost confidence in the shares of the social networking giant, while others see this as a risk opportunity

Facebook: An "appealing risk-reward" opportunity?

While many investors lose confidence in Facebook shares, as well as in the other social networks that falter in the stock market, others arrive to take advantage of the cheap shares. The latter applies to the investment fund Renaissance Technologies, owner of 84 billion dollars that has been buying shares of Facebook since they began to drop earlier this year, waiting for its eventual rebound. So far have accumulated 2.47 million shares valued at 479.5 million dollars, according to Market Insider.

Leer en español: Facebook: ¿Una "atractiva oportunidad de riesgo y recompensa"?

The crisis that Facebook has been dragging for several months, after the discovery of Cambridge Analytica scandal, exploded in the market last month when on Thursday, July 29, the social networking giant lost about 120,000 million dollars. Its shares went from 217.5 to 169.6 dollars, which was a major setback for the company after it presented a negative balance for its second quarter of the year. However, the stock market crisis has not stopped since then, because Facebook has struggled to recover value. Today, their shares are priced at 180 dollars.

The fall was abrupt, reaching a decrease of 23% until July 30, according to CNN Money. Linked to this collapse are also the losses of Twitter, another of the big social networks that has come to lose up to 28% during the same period. To put in perspective the amount of money that Facebook lost in a single day, the 120,000 million dollars is equivalent to 1.4 times the budget of Colombia for 2018, according to CNN. The losses of Facebook and Twitter together are equivalent to half of the Colombian GDP, explained Portafolio.

Have social networks reached their peak?

This financial situation has made analysts wonder if social networks have reached their ceiling. The constant and ample growth that the social networks had shown in the last time made see these market options, especially Facebook, as a safe bet. However, the growth rates presented in its last quarter show a slowdown that does not match the budget. According to Richard Windsor in his article Facebook Q2 18 - Roosting chickens, it is hardly logical to think that for such a large company it is increasingly difficult to keep up with these growth rates.

Some analysts, such as Ross Gerber, consider that social networks have reached their peak, says Reuters; and, therefore, that its value in the market will begin to decrease progressively. Others, such as digital market expert Gene Munster, advise a more moderate position of expectation regarding the future of Facebook, according to CNBC.

You can also read: What is a short sale? Betting against Nintendo

Of course, the current financial situation of Facebook, as well as that of Twitter, has caused investors to be leery and want to abandon their actions before an irreversible debacle occurs. However, CNN Money reported that investors should wait and take into account the social network's history, which in the long term has been right in the changes it has introduced and the risks it has taken.

"The most appealing risk-reward name in large cap"

According to Mark Mahaney of the RBC Capital Markets bank, Facebook investors exaggerated their reaction to below-expected earnings. Analysts like Mahaney support decisions like that of Renaissance Technologies to buy while the price goes down. The argument of Mahaney lies in that the mechanics for the profitability of Facebook, its platform of advertisers, still works perfectly. The fall is due to user concerns about the security of the platform, a matter that Mahaney considers can be fixed.

"I think [Facebook] its the most appealing risk-reward name in large cap, maybe in tech, but certainly in internet," Mahaney told CNBC Markets. For him, the issue of security is crucial. "If they don't get the security platform right, it's all over. We think they will, if they can, this is a good asset. This is the opportunity to buy this stock here."

Long-term changes

The strong fall on Thursday in the stock market can be interpreted as a sign of the deep crisis that Facebook lives as a company. To this position Joe Romm joins in his article How Zuckerberg destroyed Facebook's brand, which explains the big mistakes that Zuckerberg has had as CEO of the company. According to Romm, Zuckerberg has never been able to create a true north for the products he sells, leaving users with the question of whether Facebook is created for them or if they are really the product of Facebook.

According to CNN Money, Daniel Ives warned that both Facebook and Twitter should change their business model, in order to clean up the social network of security and information problems. However, this is not the only problem, since Zuckerberg's company must recover the confidence of its users, its investors and the general public in the future.

LatinAmerican Post | Jorge Ovalle

Translated from "Facebook: ¿Una "atractiva oportunidad de riesgo y recompensa"?"

We use cookies to improve our website. By continuing to use this website, you are giving consent to cookies being used. More details…