WhatsApp Fake News Crisis Hits FB

As if Facebook (FB – Research Report) hasn’t had enough to deal with recently, a new- and very worrying- problem has now come to light. Reports are emerging that Facebook’s WhatsApp messaging service flooded voters with fake news and misinformation during the recent Brazilian election campaign.

Jair Bolsonaro

Left-wing candidate Haddad alleges that businessmen supporting Jair Bolsonaro paid to deliver misleading propaganda to voters via WhatsApp in violation of electoral law.

We are talking everything from false rumors, manipulated photos to decontextualized videos and audio hoaxes. One conspiracy theory even held that Bolsonaro staged his near-fatal stabbing at a rally last month. Bolsonaro- who subsequently went on to win the campaign- denies the claim.

A key fact to bear in mind is that out of the 210 million people in Brazil, over 120 million have WhatsApp. This makes the free messaging tool an incredibly powerful way to reach people. Plus while the service’s end-to-end encryption keeps messages private, it also means WhatsApp struggles to regulate the app.

In Brazil, WhatsApp took three main courses of action to deal with the problem. Namely: limiting how many people you can send a message to, blocking 100,000s of accounts showing ‘bot-like’ activity, and running ad campaigns on fake news identification. Whether these will be sufficient to prevent another ‘WhatsAppgate’ remains to be seen.

This isn’t a fact that has escaped analysts. While Facebook has struggled with its image following the Cambridge Analytica data scandal, WhatsApp is still well-trusted by users. Could its reputation now be in jeopardy, and what would that mean for Facebook?

Wall Street Reacts

As we can see, Facebook still has a Strong Buy consensus from the Street. This is with a $188.55 average top analyst price target, indicating upside potential of over 25%. However, one five-star analyst, Pivotal Research’s Brian Wieser (Track Record & Ratings) has just published a Sell rating on the stock. He sees prices potentially dropping a further 17% to just $125.

View FB Price Target & Analyst Ratings Detail

“As before, we continue to view the long-run revenue opportunities for Facebook more negatively than much of the investment community does because we see limits to growth for the overall advertising industry” Wieser explained following the company’s Q3 results.

And the earnings call did little to persuade him that FB has a handle on its operational issues, including WhatsApp:

“Leading the call by talking about WhatsApp messaging and the positives of its encryption without reference to the ways in which its mass forwarding capabilities contributed to the spread of fake news during Brazil’s election this week or in India probably won’t endear the company to activists and governments concerned about these developments.”

Moreover: “Characterizing the shutdown of Partner Categories and tighter standards for Custom Audiences in context of protecting user privacy seemed somewhat disingenuous given how much data Facebook still collects on consumers and uses in ad targeting without informed consent.”

Downside Risks

Consequently, he sees downside risks to opex relative to guidance. This is because of continuing systemic problems that manifest through underinvestment in operating resources and risk mitigation. For Wieser, these problems range from poor management of data partners and supplying advertisers with incorrect or misleading metrics to providing a platform which has aided in social ills such as the destabilization of societies and genocide. For example Facebook admits it did not do enough to prevent incitement of violence and hate speech in Myanmar.

Bottom line: “If Facebook does appropriately respond to these and other problems, the costs could be substantially greater than even the company anticipates. Overall, post these results we are reducing our price target to $125 vs. $131 previously on a YE2018 basis. We continue to rate Facebook Sell.”

Even though the Pivotal analyst has a contrarian stance on the stock, his FB track record is undoubtedly impressive. He is currently tracking a 97% success rate and 26% average return per rating:

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