In my dividend growth portfolio, I always look for a way to increase my exposure to the information technology sector. The companies in this sector are less likely to pay dividends as many of them are still in the rapid growth stage and use the cash generated to build their business and improve the fundamentals.
Therefore, I find myself many times left with the companies with lower growth rate. I have long-term goals for my portfolio as I am a young investor. I am willing to invest in companies for their future dividends. I look for companies in the sector that have grown their free cash flow and have plenty of cash in their balance sheet.
Eventually, these companies will consider paying dividends, as their cash position will keep growing. This is the same process that happened with Cisco (CSCO) and Apple (AAPL). As part of this strategy, I own shares in Alphabet (GOOG) (GOOGL) and Facebook (FB) as both companies grow their FCF and, I believe, will eventually share their wealth with their shareholders.
Facebook is a great company, but it is still immature and looking for guidance and a solid plan. The problem with Facebook is not with the fundamentals, or the risk to its business model and even not from future growth opportunities. The problem is with trust. It cannot gain the investors’ trust due to a series of scandals. It has to choose its path and grow up.
Current ad boycott scandal
When I talk about scandals, I’d like to note that I am not talking about the current advertisers’ boycott. I believe that this is a public relation move by several brands who want to get some good publicity with certain demographics, and I find this move legitimate, but I do not believe it is really intended to hurt Facebook.
Everybody knows that FB is a bad erratic boy, so they take advantage of it. When you are the bad boy, you may be blamed for everything so others can avoid criticism, or gain good PR.
We are practically in a recession. The coronavirus is here to stay for the next quarters, and the level of uncertainty is high. During recession, companies tend to cut expenses, and that includes advertising expenses. They advertise less online, but also in television, radio and newspaper. The only difference here is that, due to Facebook’s reputation, they were able to cut expenses and still get free publicity. It’s a win-win for these firms, and they just capitalized on this opportunity. I doubt it really comes from an ideologic position.
Scandals in Israel and America
In Israel where I reside, Facebook is under consistent pressure. Itai Leshem is suing the company for colluding with the government. He petitioned even to the Supreme Court in Israel in his attempt to uncover the company’s possibly illegal behavior. The allegations are severe, and Facebook is using every tactic to delay him and bully him and other media outlets, according to him.
On the other end of the political map, we have right-wing users who claim they’re suspended and punished for publishing information which is uncomfortable for other people. This is not just about bots or unknown people. Even Professor Gadi Taub, a right-wing lecturer from the Hebrew University of Jerusalem showed today that he was warned by Facebook. He claimed that every opinion which is not aligned with the “right” opinion is being silenced.
(Source: Gadi Taub’s Twitter Account)
The examples above are just two examples, which I believe most reads aren’t aware of as it happens in Israel and hurt public opinion on both sides of the political field. I am sure most people are aware of the Cambridge Analytica scandal where a company harvested information in order to use it for political gains to the highest bidder while Facebook did almost nothing to prevent it in real time.
While this scandal influenced the Brexit and the 2016 presidential elections, we have now a new scandal and constant debates over the current November elections. Facebook is blamed on the one hand for spreading hate speech and racism by the left, and on the other hand, the right blames Facebook for censorship. Every side brings some good examples to censorship and hate speech, and this happens due to Facebook’s lack of direction.
The need of a philosophy
Facebook is immature. It tries to please everyone even when it’s obvious it can’t. When we grow up, we choose our path, and our goals, and understand that we might aggravate people on the way. However, when we communicate our goals and ideology well, it is easier for others, and soothe any friction. When you try to always appease everyone, you end up aggravating everyone.
When a company grows and matures, it also chooses its path. The people and customers understand it and make their choice whether they want to associate themselves with the company. Even companies with controversial products like Coca-Cola (KO), Altria (MO), and Las Vegas Sands (LVS), avoid major scandals. They do it not because they stopped selling controversial products or services, but by being clear about their services and their goals.
Facebook should adopt a business plan and a philosophy and stick to it. If Facebook wants to be neutral, it will go ahead communicate it and deal with the backlash and the consequences. If Facebook wants to limit certain types of messages, again it will go ahead, communicate it and deal with the consequences. The lack of a clear philosophy is critical here. We only hear from its leadership new age texts with no clear boundaries.
At the end of the day, Facebook is an advertising platform. Advertisers need stability and understand what crowd is present. You use different commercials in Fox News and in MSNBC, and there’s nothing bad about it. If Facebook matures, decides what it expects from itself and the users, set clear boundaries, it will attract more advertisers and increase user satisfaction.
FB must grow up. It must explain thoroughly its ethic, ground rules, what kind of speech is welcomed and what is not welcomed on the platform. Then, it will suffer some consequences from users and advertisers alike. No matter what it chooses, it will suffer in the short term, but after the initial blast, people will know what to expect and what will they see, and Facebook will be able to keep focusing on the business and not on dealing with an infinite number of scandals.
This way, it may be able to attract new investors who don’t want their companies constantly in the news cycle. Investors like me want a boring company that works quietly to grow its free cash flow and hopefully pay dividends. The leadership should be more professional and clearer about its intentions both ethically and financially, or else it should be replaced. The current fundamentals are strong, but due to the never-ending scandals that hurt the brand constantly, I will not be adding to my position.
Disclosure: I am/we are long FB, MO, KO, CSCO.AAPL. 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.