Analyst Wonders, 'Will Facebook Do The Right Thing?'

Facebook, Inc. FB was supposed to make everyone happy by connecting users with family and friends, but it now has a major trust problem related to privacy policies and it's unclear how the company will proceed to fix its reputation, according to Stifel.

The Analyst

Stifel's Scott Devitt maintains a Hold rating on Facebook's stock with a price target lowered from $195 to $168.

The Thesis

Facebook was founded with the intention of ultimately making "humans happy" by connecting them to friends and family, Devitt said in a research note. Over time, Facebook users became less happy as some experts suggested social media can bring a negative impact to well-being and mental health. Facebook went on to add even more public content to the platform, which led to people interacting with even more strangers. Facebook's latest privacy fiasco and associated fallout adds another element of concern among investors.

Devitt said the situation reminds him of eBay Inc EBAY In 2004:

"An unstructured content business built on trust that lost that trust prior to implementing policies to add structure and process. Just like PayPal was going to save eBay, Instagram may save Facebook…eventually."

Devitt said Facebook now has an opportunity to "clean up" its product, but at the expense of usage and monetization. In other words, doing the "right thing" will negatively impact the advertising business in the short-to-intermediate term.

"Will Facebook do the right thing? We don't know," Devitt concluded. "If Facebook does the wrong thing, it could run into more trouble in the future. Will Facebook do the wrong thing? We don't know."

Price Action

Shares of Facebook were trading lower by 3 percent at $164.

Related Links:

The Facebook Data Controversy: What Wall Street Thinks

Marc Chaikin: It's A Stock Picker's Market