Last week, Meta Platforms (META -2.31%) announced that it is shutting down the third-party fact-checking programs on its social media platforms. CEO Mark Zuckerberg says that those platforms, including Facebook and Instagram, are designed so that, "people can express themselves freely," and asserts that this decision will help facilitate that.
It's an interesting move, not just due to its timing -- right before President-elect Donald Trump's inauguration -- but also because the volume of misinformation spreading on social media has only been growing over the years. For Meta Platforms, the decision to retreat from its attempts to stem that rising tide may not pay off for the business, and it could spell bad news for the stock.
Following in the footsteps of X
Zuckerberg says that in the absence of a third-party fact-checking program, users will be able to effectively regulate the platform themselves using a "community notes" system. If you use X (formerly known as Twitter), you may sometimes see notes attached to posts that add context or more information.
The premise is that this could potentially loosen restrictions on free speech while also countering fake news, misinformation, and disinformation. If users can leave notes on questionable posts that provide valuable context, that might prevent others reading them from reaching incorrect conclusions.
However, the model X is using may be a risky one to copy. Many advertisers have left the social media platform in the period since Elon Musk took over, due largely to their concerns about its weaker moderation policies and the volume of extreme and controversial content on the platform. Brands typically don't want to be associated with controversial content, as they have little interest in alienating significant fractions of their customer base.
While loosening restrictions in the name of free speech may sound like a great idea to some people, it also raises the question of how impartial the new moderation protocol will be. The community-based model also assumes that users will take the time to carefully read those notes rather than instantly reacting to posts that may outrage them.
A drop in advertising revenue could derail the stock's progress
Many people see Meta's shift as an attempt to appease Trump, who was banned from Facebook back in 2021 for a period of two years. Enacting Trump-friendly policies on its platforms now could spare Meta scrutiny and pressure from government regulators or Trump himself later.
But the bigger risk is that many advertisers could start shifting significant quantities of their marketing spending to other platforms instead. Facebook has often had problems with being associated with fake news and disinformation, and in the generative artificial intelligence era, it's only becoming easier for bad actors to create such misleading content. The need for rigorous fact-checking on social media platforms is arguably increasing. Moving away from it may prove costly for Meta.
One big reason the stock has soared more than 400% since the start of 2023 (after falling by almost 70% from its peak from late 2021 through 2022) is that the business has flourished due to growing ad spending on its platforms. With a U.S. TikTok ban looming and advertisers pulling away from X, Meta has been even more of a go-to option for marketers than it had been previously. During the first nine months of 2024, the company's sales rose by 22% year over year to $116 billion while net income soared by 66% to around $42 billion.
If Meta's growth rate slows down, that could put pressure on the stock, which is trading around record levels and at close to 30 times its trailing earnings -- a sizable multiple, which may be hard to justify amid more modest growth.
Is Meta Platforms stock still a good buy?
This social media stock has benefited from an increase in ad spend on its platforms in recent years, but I'm not convinced that trend will continue. There are a growing number of alternative ways for advertisers to reach consumers. For example, Walmart's acquisition of TV maker Vizio may give a boost to its advertising business, while social media company Reddit is also expanding efforts to generate advertising revenue on its platform. Plus, given the uncertainty about how the economy will fare in the near future, it's possible that companies will again reduce their ad spending to conserve money.
While Meta has achieved some considerable gains in recent years and generated fantastic growth along the way, eliminating its third-party fact-checking system could be a costly move at an inopportune time. For investors, I think there are better growth stocks to consider than Meta Platforms today, as given its elevated valuation, it may be due for a correction.
