Technology-focused fund managers are split on the outlook for Facebook (FB.O) after the social media giant's growth warning that sent its shares plummeting.
Shares in Facebook have fallen 21% since the company last Wednesday reported revenue growth would be lower than expected due to increased spending on staffing, research and security following the Cambridge Analytica scandal and the introduction of GDPR regulations.
Price cuts stake on news
Walter Price (pictured), manager of the £481 million Allianz Technology (ATT) investment trust, cut his stake on the news.
Facebook was the third largest holding in his fund at the end of June, accounting for 3.7% of the portfolio, but after offloading shares Price now holds less than 2% of his fund in the stock.
'We were disappointed in the results and sold stock in the aftermarket,' he said.
'The issue is that costs of new data centres to support video initiatives and costs for improving the platform in content filtering and fake news removal are increasing faster than revenue.
'This means that the company is in a period of slow or no earnings growth for the next year or so.'
Price said he was 'neutral' on Facebook at the current share price, and while he has retained a position in the stock, it is well below the 6.6% weighting in his benchmark, the Goldman Sachs Technology Index.
He said the shares were now set for a period of consolidation 'until investors are more confident in the traction of the new advertising platforms'.
'We think the company will resume earnings growth in 2020, and if we are correct, the stock will appreciate further in the future. A company with 2.5 billion monthly users is very valuable.'
Share price plunge an 'overreaction'
Gleeson has the heaviest weighting of any UK fund manager to Facebook. The social media giant accounted for 7.2% of his fund at the end of June, although that position will now have shrunk given the fall in the shares.
He said the share price move was 'a combination of profit taking on a stock that had been up significantly in the last few months, and an over-reaction to the company flagging some near-term issues that they are facing'.
Gleeson argued that the clouds surrounding Facebook since news of the Cambridge Analytica scandal broke in March had been exaggerated.
'Back in April we flagged that the financial impact of GDPR and the reputational challenges facing the firm had perhaps been amplified in the media with some potential mis-reporting and as a result these issues could overhang the company for some time,' he said.
Shares in Facebook were hit in March on news digital consultant Cambridge Analytics improperly accessed Facebook data to build profiles on US voters that helped to elect president Donald Trump. That escalated into wider concerns over a crackdown from governments on the proliferation of 'fake news'.
The introduction of European GDPR legislation, which required Facebook to give their consent over how their data was used, had also animated bears on the stock.
Despite this, the shares continued to rally. After falling around 18% in the midst of the Cambridge Analytica scandal, they then embarked on a 43% surge. Even with last week's fall, the shares remain well above the level they hit in March.
Investor crowding exaggerates fall
But also playing on his mind was the popularity of technology giants among investors after years of strong performance, and how this could amplify the reaction to any bad news.
'Mega cap technology names have increasingly become safe haven staples in investors’ portfolios and are well-represented in numerous passive products,' he said.
'The possibility that a hiccup for one, like Facebook, has a negative technical effect is very real and it is a risk we have been concerned about for some time.'
While this fear has been realised, Hawtin hasn't seen anything in last week's Facebook news to change his long-term view of the company.
'I believe that Mark Zuckerberg and his management team are one of the best in the sector and it is probably very healthy to reset expense and margin expectations,' he said.
'There is still no social network like Facebook; its reach is unparalleled and it is almost impossible to replicate the experience and value for either users or advertisers anywhere else.'
Facebook remains a hugely popular stock not just for technology-focused fund managers but those with a broader global remit.
That's despite some having been prompted by the Cambridge Analytica scandal to sell all, or part, of their stakes.
Citywire A-rated James Thomson sold all the shares he held in his £1.4 billion Rathbone Global Opportunities fund on the day news of the scandal broke. The £129 million Manchester & London (MNL) investment trust meanwhile halved its stake in Facebook in response.
Scottish Mortgage (SMT), the UK's largest investment trust with a longstanding enthusiasm for technology stocks, had been reducing its stake before Facebook's data problems hit the headlines. The social media giant is no longer a top 10 holding for the FTSE 100-listed trust.
But that doesn't appear to have dimmed enthusiasm for Facebook elsewhere at Baillie Gifford, the fund group that runs Scottish Mortgage.
Baillie Gifford Long-Term Growth, the £3.3 billion open-ended fund run along similar lines to Scottish Mortgage, has a 6.8% stake. The £1.6 billion Baillie Gifford American fund, run by Scottish Mortgage co-manager Tom Slater, meanwhile has a 4.5% holding.