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Analyst: ‘Systemic Mismanagement’ at Facebook Poses New Risks

Facebook stock began its asthmatic ascent on Wednesday, wheezing to a $1.04 per share gain (up 0.6%) in early trading March 21 even after Pivotal Research Group analyst Brian Weiser said the social media giant’s recent problems can also be traced to poor management.

Facebook has lost about $50 billion in market capitalization in the past three days after news reports that U.K. based Cambridge Analytica, which assisted the Trump campaign in 2016, used data from more than 50 million Facebook users without their permission.

Facebook shares have plunged about 10% since Monday, shedding about $50 billion in market cap. The stock got off to a rocky start on Wednesday – it was down as much as 3% in early trading to $163.30 per share, but showed a slight gain ($1.04, or 0.6%) to $169.19 per share by 11 a.m..

Wieser, who already had a “sell” rating on Facebook stock on concerns about limited growth in digital advertising, wrote in a note to clients March 21 that not all of its problems are due to outside forces, adding that the company is “exhibiting signs of systemic mismanagement.”

“Facebook has addressed some of its problems, and presumably will address the remainder or eventually be compelled to do so,” Wieser wrote. “However, investors now have to consider whether or not the company will conclude that it has grown in a manner that has proven to be untenable or whether it needs to significantly improve how it is managed.”

He added that the former would lead to a shrinking in size of the company, the latter hints at personnel changes.

“Both of these scenarios are incremental risks to those previously contemplated in our analyses,” Wieser wrote.

Some recent missteps like the distribution of “fake news," racist but legal uses of the platform and users who commit crimes and then document them while in the act on Facebook Live could be chalked up to bad luck or bad choices, Wieser wrote. But he added that other problems – like its failure to follow up on the Cambridge Analytic data leak (which was first reported on in 2015), its failure to take down some illegal content and flawed advertising metrics point to operational issues, which are a whole new class of problems for the social media giant.

“By contrast, operational failures are in some ways more problematic, because they strongly suggest that even when the company intends to comply with its legal and commercial obligations it is not always able to do so,” Wieser wrote. “They are worse when third parties find the errors, because the company should have been looking to anticipate those errors before others found them. While we have in the past described some of these problems as occurring as a consequence of rapid growth on massive scale, responsible managerial choices probably should have involved actively slowing growth in order to ensure that sufficient processes were put in place to avoid the problems that occurred. Although Facebook is certainly subject to more scrutiny because of its successes, we are unable to think of another company which has had as many operational problems as those which Facebook has experienced over the past few years.”