Facebook Rides Out the Storm … And Remains Stronger Than Ever

Facebook Rides Out the Storm … And Remains Stronger Than Ever

It was only a couple of weeks ago that Facebook was facing a Congressional inquiry over alleged misuse of member data … over 2 billion people use Facebook worldwide, with over 200 million in the US alone.  The misuse was described as a data breach at Facebook involving a hacking scheme from a company called Cambridge Analytica, who used false pretense to gain control over user profiles of voters here in the US.  It is unclear if what Cambridge Analytica did was illegal, since Facebook profiles are mostly public, creating the question – how was anyone’s privacy compromised?  In most cases, YOU grant Facebook the right to have your data.

In another time, such political scrutiny would negatively impact a company’s stock.  The stock did move into the red the day of and after the hearings, but only from 167 to 163.  By April 15th, it was back up to 168.  After it’s earnings report on Wednesday April 25th, the stock was soaring at 172 with no cap on how high it could go!  Campaigns such as #deletefacebook and the very bad public relations the company has endured has had little to no impact on its value and continued success.

Facebook is a major point of connection for most of the country’s population, and it has little competition in the marketplace, giving it a virtual monopoly on social media.  So which way does Facebook stock, and in turn, the social media investing world, look to go after this major brush-up on privacy related data?

I. What are the reasons to buy the trend on Facebook?

1)            Revenue is UP!  Revenue reports from the first quarter beat estimates by almost a half-billion dollars.  Analysts were taken by surprise.

2)            Earnings are UP!  The quarterly earnings report had earnings at 23% higher than the analysts estimated.  It was an unprecedented surge.

3)            Member usage is UP!  Despite the horrific data sharing, or stealing based upon your point of view, of the Cambridge Analytica scandal, you would have expected to see a slump in overall member usage of the site.  Instead, usage is up 48% year over year!  The privacy scandal made no dent in the public’s overall usage and engagement with the social media giant.

II. What are the reasons NOT to buy the trend on Facebook?

1)            Government regulation appears to be on the way.   Massive privacy breach … societal concern … operating as a monopoly … there is a growing consensus that large social media and tech companies (such as Google) that deal specifically with the internet can no longer be trusted with big data and acting for the public benefit.  While private companies, they also are clearly monopolistic in their industries – specifically Facebook.  These mounting problems and concerns seem to have jolted government officials, and it appears inevitable that regulation is heading Facebook’s way.

2)            Costs are escalating.  Lost amidst the euphoria of the unrelenting financial success Facebook reported this week was some book-keeping that is cause for concern.  David Williams of Williams Capital Advisors remarked on CNBC this week that you can see additional capital expense on data protection and legal fees as rising in the last quarter, and appear to be continuing into the 2nd quarter of 2018.

3)            Consumer trust has been compromised.  The currency of social media companies is consumer trust … trust in the experience, trust in the safety of their information.  The Cambridge Analytica scandal (or non-scandal:  to repeat, Facebook info on its users is mostly public, and they gave away the same data to the Obama Campaign for free in 2012) has brought to light, and the Congressional hearings focused on, a serious breach in the trust between the public, its members and Facebook.   How that will improve over time remains to be seen.

Facebook was and is the industry standard in this new age of social connection.  It has a virtual monopoly and dominates its industry.  But there are risks moving forward to a company that has so much power over the information we consume.  It is riding high for now, but like all investments, nothing stays up forever.

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