Fake News Definitely Isn’t Hurting Facebook’s Stock

January 26, 2017, 6:55 PM UTC
Inside The Oculus Connect 3 Event
Mark Zuckerberg, chief executive officer and founder of Facebook Inc., speaks during the Oculus Connect 3 event in San Jose, California, U.S., on Thursday, Oct. 6, 2016.
David Paul Morris—Bloomberg, via Getty Images

Facebook likes 2017 so far.

Shortly after the election, the social media giant caught a lot of backlash over how it was used to spread fake news in the months leading up to the recent presidential election. But fake news hasn’t been the Facebook (FB) killer that some feared, at least not in the market.

Shares of the social media giant have risen sharply in January, up 15% to a recent $133 after its stock price dipped to a six-month low to end December. New mobile ads have helped. This week, the company said that on the it has started to test placing ads on its popular Messenger app and has finally started to roll out a feature that mimics Snapchat’s trendy Story element. Shares of the tech giant were up more than 1% in midday trading on Thursday.

The recent surge may also be a signal that Wall Street is anticipating good news in the company’s upcoming quarterly earnings report, due to come out after the close of trading on Feb. 1.

But its moves on slowing the spread of fake news through its network has probably helped as well. The company announced today that it would be changing the algorithm that dictates what appears in its Trending news feed. Rather than displaying what topics and articles users have been commenting on and liking regardless of their source, the algorithm will now only display stories that have been published by several reputable sources. In addition, users will no longer see topics tailored specifically to their interests. Instead, topics will be displayed based on what is popular in the user’s particular region. The company has also announced a partnership with the Associated Press and other fact checking organizations to identify and remove fake news from Facebook’s feeds.

But while investors seem to be voting the moves will be enough to satisfy users who were concerned about fake news from exiting the site, the verdict is still out. Another concern, opening up the news that users see when they log in to stories that haven’t been shared or liked by other Facebook friends could turn off users as well. Some users may be turned off by news that isn’t validated by their own beliefs or others than know. And that’s a risk for Facebook’s shares that have priced in a good bit of growth.

After hitting an all-time high of $133.50 in late October, shares of Facebook swooned in November and December as investors weren’t swayed by a strong third-quarter earnings report that handily beat analysts’ expectations, mainly because Facebook revealed that it expected advertising growth to slow significantly as it reduced ad load, which is the number of ads that users see in their news feeds. Facebook has seen on average about 50% growth in advertising, mainly driven by increasing ad load, growth in user base, and increases in the time spent in the site, so news that the gravy train may be slowing down scared off investors.

But Facebook’s recent signals that it is still finding new ways to generate advertising revenue, as well as its strong focus on video and Facebook Live, may be enticing new investment.

Facebook’s story feature, for instance, which is being tested on its mobile app in Ireland and the company anticipates will be rolled out worldwide within months, hopes to lure back younger users who fled the social media giant in favor of Snapchat. Already a success for Facebook-owned Instagram, which rolled out the feature in August, stories allow users to share a photo or video for a brief period of time, after which they vanish. Instagram boasts 150 million daily active users of the feature, one fourth of its 600 million daily user base. Facebook, which has 1.2 billion daily users, is poised to dwarf that number should users take to the feature.

The company also announced today it has started to test placing ads in its Messenger app, which has 1 billion users. Facebook, which has been very mindful of advertising oversaturation, will not place the ads in actual conversations. Instead, they will be placed on the home screen and will enable users to start direct conversations with advertisers simply by tapping on them.

Nonetheless, with Facebook shares now trading at 25 times next year’s earnings, and income growth projected to be 26% in 2017—investors typically look for valuations to match growth rates—the social media giant doesn’t have a lot of room for error. Investors have been known to unfriend high priced stocks very quickly.

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