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Will Facebook (FB) Manage to Stage a Comeback in 2019?

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Facebook, Inc. (FB - Free Report) had a rough time in 2018, thanks to a host of factors that tarnished the brand’s image. The Cambridge Analytica scandal, Russian-disinformation, data breaches and proliferation of fake news were some of the incidents that battered the reputation of the tech giant.

Per reports from Forbes, Facebook lost $35 billion in market value in March due to the Cambridge Analytica data fiasco that affected 87 million subscribers. In September 2018, the company was embroiled in another security breach, where personal information of 30 million users was compromised

In November 2018, the company was hit by the Russian-disinformation scandal. Per reports from New York Times, Facebook’s executives left suspicious Russian activities on its platform unattended. The company not only tried to mask the issue from the public but also attacked its peers like Google by disseminating negative news on their business practices.

To add to its woes, this month, Facebook announced that a software bug gave outside developers’ access to photos of 6.8 million users. These photos were either not posted or posted in Marketplace or Facebook Stories section instead of the timeline.

Recently, Facebook revealed sharing private messages of its users to Spotify (SPOT - Free Report) , Netflix (NFLX - Free Report) and the Royal Bank of Canada, which enabled users to communicate with one another using the third-party services. The company’s negligence toward users’ data safety remains a big concern.

Facebook, Inc. Revenue (TTM)

Facebook, Inc. Revenue (TTM) | Facebook, Inc. Quote

Security Lapses Remain the Biggest Concern

The security issues are not only spooking users but also advertisers. Since advertising accounts for more than 98% of Facebook’s revenues, this is likely to impact top-line growth. In fact, management projects revenue growth rate to decelerate in mid-to-high single digit percentage in the fourth quarter.

Moreover, the company projects total expenses in 2019 to surge 40-50% from 2018 driven by Facebook’s significant investments to strengthen platform security.

Facebook has taken several measures to curb misuse of its platform throughout 2018. Recently, the social media giant removed several accounts and pages that spread misinformation and engaged in “coordinated inauthentic behavior,” ahead of Bangladesh election.

Facebook also put together a team of specialists to monitor the upcoming Lok Sabha election in India. Moreover, the company is working closely with the Election Commission of India to limit the dissemination of fake news and external interference on the platform.

Prior to this, Facebook had undertaken similar security measures ahead of election in Brazil, the United States and UK.

Additionally, Facebook is improving transparency and security for its ads and pages. It recently announced a pilot program to help secure U.S. candidates and campaign staff from “hackers and foreign adversaries.”

Further, the social media giant announced that the company will restrain from physically sending its employees to promote the use of the platform for political campaigns.

Facebook’s efforts to plug security loopholes as well as limit fake news globally are expected to eventually boost trustworthiness.

WhatsApp and Instagram: Key Catalysts

Instagram and WhatsApp have emerged as Facebook’s cash cows. Instagram boasts more than 1 billion monthly users and 500 million daily users, while the latter has an estimated user base of over 1.3 billion.

The company continues to add features on Instagram to entice users and advertisers. Notably, Stories on Instagram has surpassed 400 million daily actives.

Moreover, the company is looking for ways to monetize Instagram Stories and adding e-commerce features to the platform. Facebook’s endeavor to incorporate AR technology into Instagram’s shopping app can act as a differentiator in terms of providing better customer experience.

To monetize WhatsApp, Facebook is bringing “conversational commerce” to the platform. WhatsApp status now has 450 million daily active users (DAUs) globally. The company is also planning to roll out ads on WhatsApp status.

We believe that Instagram and WhatsApp’s robust future prospects are expected to help in the tech giant’s revival in 2019.

Facebook Ventures into Video Streaming

Facebook intends to cash in on the ever-increasing trend of video viewing on social media platforms. The social media giant has a budget of $1 billion for its video initiatives.

Through Watch, the company is trying to incorporate more video-oriented content, including original shows and live streaming of sports events like Major League Baseball (MLB). Exclusive streaming rights for Copa Libertadores & UEFA Champions League matches in South America as well as Spain’s La Liga matches in the Indian sub-continent are expected to boost user base in 2019.

Facebook unveiled In-Stream Reserve program and ThruPlay on its platform for companies to advertise on the most popular videos on its platform. As video ads generate more revenues than its photo and text-based substitutes, Facebook is trying to incorporate more and more video-oriented content to bring in more ad dollars and boost its top line in the near term.

Facebook is also investing heavily in Artificial Intelligence (AI) to lure users. The company recently launched Portal, an AI powered voice-controlled device with features like smart camera, speaker, digital assistant and video calling.

Portal’s features are expected to boost Facebook’s position in the smart speaker market, currently dominated by the likes of Amazon Echo, Google Home and Apple’s HomePod.

Will a Change at the Top Aid Facebook?

Per reports, Facebook’s CEO Mark Zuckerberg’s net worth of $75 billion in the beginning of the year scaled down to $60 billion by the end of 2018. Moreover, year to date, the stock has lost 29.7% compared with the S&P 500 composite’s decline of 12%.

Facebook’s top investors including state and city treasurers are yearning for a change at the top. Shareholders have given a proposal to the company’s board to separate the CEO and chairman positions and want Mark Zuckerberg to step down.

The shareholders have made at least six attempts since 2012 to remove him as chairman but have failed owing to the dual class structure of the company, which allows Zuckerberg to control 60% of shareholder voting power

Apple’s (AAPL - Free Report) CEO Tim Cook too criticized Facebook’s business model of monetizing customers’ personal information and said that the time to regulate the platform has passed away.

However, Facebook’s current endeavors to regain user confidence are hard to ignore. Moreover, the company’s huge user base provides it a significant competitive edge. The stock currently carries a Zacks Rank #3 (Hold).

Key Picks

Etsy (ETSY - Free Report) and Internet Initiative Japan (IIJI - Free Report) are better-ranked stocks in the same sector. Both the stocks have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Expected long-term earnings growth for Etsy and Internet Initiative Japan is 15% and 13.5%, respectively.

In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?

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