By Scott Tzu
Almost all of the headlines going around about Facebook (NASDAQ:FB) are about the litany of fake news that was being peddled through the site leading up to the election. However, this has been an issue since long before the election and has been one of the reasons that we have kept a cautious eye on Facebook. Not only can these fake news events potentially alter history, as many claim that they did for the presidential election, they are a deterrent to a class of users that have helped build Facebook's user base over the last 15 years.
And these issues are coming to the foreground at a point where Facebook's valuation seems very full to us.
Many arguments coming out of the Facebook bear camp include the notion that the company is seeing a turnover in its user base. While it is still growing users, the users that it is adding are a completely different person than the type of user it was adding years ago. You have probably noticed this as you have watched more elderly individuals and some individuals from outside of first world countries make their presence felt on Facebook.
Theoretically, this should be a good thing. If you're going to create a social media platform that allows everybody to connect with everybody else, ostensibly you should be welcoming anybody and everybody that wants to join. The problem is, however, that the younger generations who were the first adopters of Facebook are bypassing Facebook in favor of Snapchat and Instagram. The platform simply doesn't have the hold on younger users the way that it used to and user saturation is now widespread.
This doesn't mean that Facebook can't add new users, it just means that the well that they started tapping 10 years ago has started to run a little dry.
Those that joined back when Facebook was a social media site simply for college students are now in their mid-30s. We have a couple of them in this office. Facebook has drifted so far away from what it once was to these users that we almost don't even recognize it when we logon anymore. Remember how weird it was when you first saw a family member on Facebook? We do. Can most of you even tolerate looking at your timeline now? We certainly can't. It seems to just be a combination of looping five second videos with one liners, sob stories, requests for likes and shares, and headlines so sensationalistic that one has to simply assume that the content behind the link is either outright made up or not nearly as good as its sensationalistic headlines are making it out to be.
Yes, people have found a way to use Facebook to drive traffic and they can do it effectively by using enticing headlines but not divulging the content of their stories. The "new" Facebook user is the one that is clicking through these advertisements, while we would guess that the majority of older Facebook user simply just recognize them as spam for the most part. We do.
In addition to losing some of the younger generation to other apps, Facebook now has to face a challenge where users like us in the office, who are in our mid to late 30s, don't really see the use for what Facebook provides when we log on and we see our timeline. The person aged 30 to 40, with an education under their belt, may be looking for a little social interaction but isn't necessarily looking for fake news stories or outrageous posts about controversial subjects that most of us log on to get away from.
Not only is it poor from a journalistic standpoint, but it is also ruining Facebook's credibility each day that they continue to allow their newsfeed or timeline to look like it does right now. It is starting to look like when you open up your junk folder in your email and try to root through everything to find the one legitimate email that you actually wanted to read and answer. It is just mountains and mountains of spam and garbage, with the occasional post from a friend or family member.
Facebook should actually be glad that its fake new stories had such a profound impact on the election, because it is forcing them to do something about it. The younger generation and Silicon Valley, most of whom probably voted for Clinton, just saw the election stolen out from underneath them through use of a social media platform that they created.
Truth be told, this was an issue that we had noticed a while back. As Facebook works to monetize more and more of its platform, the quality of the platform becomes less and less appealing. The company needs to find a sweet spot between being able to advertise efficiently and effectively while keeping the platform looking like it has some integrity.
The platform is maturing, and it is yet another reason that we are not sure that buying Facebook here at this valuation is the right call. With money now moving out of tech, and into industrials, many people may be thinking that this could be a spot to take advantage of some cheaper prices in technology sector. The fact of the matter is, however, that we think Facebook has matured and that it's going to be a difficult stretch for its operations over the next couple of years to match it's valuation currently.
This is a war that the company is fighting but one that we believe the company is losing. Fake news makes up a key part of a real problem that Facebook is going to have to face.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.