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Will Facebook’s [FB] share price get much-needed lift from Zuckerberg’s privacy pivot?

Mounting public and regulatory pressures have led Facebook [FB] to rethink its business model. CEO Mark Zuckerberg published his vision for a privacy-focused social network on 6 March, which largely unaffected its share price. 

A 14-hour network outage – its longest in history – on 13 March caused the stock to dip 7.5%. Despite some gains since, and an overall increase in share price in 2019, the stock is still trading 25% off its July 2018 all-time high.Facebook 1-year share price performance, CMC Markets, as at 22 March 2019

 

Zuckerberg had first indicated his intentions to integrate its family of apps – Messenger, Instagram and WhatsApp – under one network in January, but with a slew of privacy and political scandals in its wake, the company looks to be accelerating its plans. 

The privately-focused messaging and social networking platform will be underpinned by several principles, including end-to-end encryption, private interactions, safety, interoperability and secure data storage. 

“I believe we should be working towards a world where people can speak privately and live freely knowing that their information will only be seen by who they want to see it and won't all stick around forever,” Zuckerberg wrote. 

 

What’s next?

As part of the shift, Facebook is developing commerce, payments and various other services to function across the platform, which will enable a new form of value creation within the company. However, this will not replace its lucrative ad-based business model that generated a record $55bn in revenue in 2018 and a 40% profit margin, which could be affected by the privacy rules.

 

Market cap$473.99bn
PE ratio (TTM)21.94
EPS (TTM)7.57
Quarterly Revenue Growth (YoY)30.40%

Facebook stock vitals, Yahoo finance, as at 22 March 2019

 

On the other hand, the shift to a privacy-focused network is likely to help rebuild trust in the brand, as well as protect the company from regulatory threats and reduce its liabilities. The secure communication platform will also likely reduce moderation costs.  

Bank of America Merrill Lynch analyst Justin Post raised concerns over the revenue impact of a more privacy-centric platform in a note to clients, as private messages have lower monetisation. He cut his price target on the stock from $205 to $187. 

“While Facebook still has big opportunities to improve the monetisation of stories and messaging, the question is if usage will deteriorate on core news feed,” he said. 

“While Facebook still has big opportunities to improve the monetisation of stories and messaging, the question is if usage will deteriorate on core news feed” - Bank of America Merrill Lynch analyst Justin Post

Despite some analysts holding reservations on the stock, 41 analysts have a buy rating with an average price target of $196, suggesting an uptick of nearly 20%.

And while some analysts doubt Facebook is changing its data collecting ways, others such as Wedbush Securities’ managing director Dan Ives believe the social media company is moving in the right direction. 

“Zuckerberg and Facebook are trying to build a platform that caters towards more privacy and data security which is a major concern for consumers worldwide,” he told CBS News. “This is a hot-button issue not just for Facebook but the rest of the tech world, and it's a big step forward to the next evolution of messaging.”

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