Facebook shares fall from record as Wall Street grows wary of growing costs to combat 'false news'

  • Facebook beat analyst expectations on the top and bottom lines on strong advertising revenue and continued user growth overseas.
  • But some investors and analysts are concerned that the company's plans to funnel more funds into security, video and content will put pressure on profit.
  • Shares of Facebook fall Thursday.

Wall Street largely gushed over Facebook's comfortable earnings beat, but analysts are keeping a wary eye on the social network's costs for security and content.

Shares of Facebook fell 2 percent in early trading Thursday, despite its much better-than-expected results Wednesday. The stock closed at a record Wednesday, up 59 percent for the year.

Analysts fear the controversy over how Russia surreptitiously used Facebook during the 2016 election is not just bad PR but may hit the social media titan's impeccable bottom line as the company invests further in security to take itself out of the political crosshairs.

"With the backdrop of Facebook, Google, and Twitter in front of the Senate Intelligence Committee on Wednesday, and generally increasing discussion of regulatory scrutiny of mega-cap tech, Facebook and Mark Zuckerberg in particular placed heavy emphasis on security and the integrity of the Facebook platform" during the company's post-earnings conference call, JPMorgan analyst Doug Anmuth wrote in a note to clients Thursday. "Importantly, Facebook will increase the number of people working on safety & security (both FTEs & contractors) from ~10k now to 20k over the next year."

While Anmuth felt that the company's efforts to curb fake news and hate speech on its platform would ultimately serve Facebook well, many analysts are concerned that increases in short-term spending may put pressure on attractive margins.

Facebook, Google and Twitter representatives have been testifying before Congress this week as lawmakers try to discover how each company allowed stealth Russian posts and whether there needs to be more regulation of tech companies. And while each company has voiced interest in dealing with interference in social media internally, the possibility of regulation also weighs on investor sentiment.

"Facebook's efforts will come in many forms — increasing transparency of political and issue ads, removing problematic content such as false news and hate speech and bulking up review of ad content," added Anmuth.

Anmuth wasn't the only analyst to comment on the company's plans.

"The changes are particularly aimed at curbing misuse of the platform similar to what the Russian government perpetrated during the U.S. 2016 election," Macquarie's Benjamin Schachter said in a note to clients. "Facebook plans to raise the standards of transparency for political ads on the site, rolling out a tool to let users see all of the ads a page is currently running, and also an archive of political ads the advertiser has run in the past."

Zuckerberg's company indicated that operating expenditures will increase 45 to 60 percent as the company funnels more cash into security, video content, augmented reality and artificial intelligence.

"We're building, we're doubling — in some cases more — our engineering teams focused on security," Zuckerberg said Wednesday. "We're building AI to go after more different areas of harmful content and finding fake accounts and other bad actors in the system. And I expect that all of these things will make our product better over the long term, but we will incur the expenses a lot sooner as we ramp up these efforts."

To be sure, Facebook's performance so far this year is nothing to complain about.

The company posted FX-neutral advertising revenue growth of 47 percent year over year thanks to ad pricing ramp, a "rare and impressive" feat according to Anmuth. Overseas growth in monthly active users — a key metric for Facebook — also looks promising to many analysts.

Shares have soared 59 percent this year, easily outpacing the S&P 500's impressive 15 percent climb since January.

"FB remains our top large cap internet pick and we think that momentum in the name can continue through the end of the year," wrote Jefferies analyst Brent Thill. "We see upside to average revenue per user, monthly active users, and Instagram."

Several analysts highlighted photo-sharing app Instagram as a potential catalyst for Facebook and an area for increasing ad load.

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