Can Facebook’s (FB) Stock Be Derailed by Politics?

Facebook's political troubles are mounting fast. The solution won't come cheap.

Facebook Inc (NASDAQ:FB) has attracted a lot of attention over the past month. Unfortunately, many of the stories have been negative. It’s said that there’s no such thing as bad news, but FB stock may put that adage to the test here shortly.

FB Stock

When I last covered FB stock, I discussed the pros and cons that Facebook will be facing in coming quarters. It hasn’t taken long for one of those cons to come to the forefront. I mentioned political risk as a notable concern, and events over the past few weeks are showing Facebook’s vulnerability on that front.

What Happened?

Hillary Clinton has just released a new book called What Happened discussing her election defeat last fall. While she cites many factors as important to her defeat, one of the key ones is the attempted Russian influence on the election.

Recently, The Guardian wrote about the Russian political involvement. It reported that Facebook “said that many of the [Russian] ads promoted 470 “inauthentic” accounts and pages Facebook has now suspended. The ads spread polarizing views on topics such as immigration, race and gay rights, instead of backing a particular political candidate.” While Facebook was quick to reiterate that Russia didn’t back any particular candidate directly, it doesn’t take a great deal of reading between the lines to guess what direction a Putin-led Russia would likely have leaned.

The paper also reported that Facebook is cooperating with federal inquiries into manipulation of the 2016 election. This sort of thing would be a headache for any large internet organization. But it comes at a particularly nervous point for FB stock.

Europe Is Taking On The Tech Titans

Europe in particular has been cracking down on Facebook lately. The EU leveled a more than 100 million Euro fine against Facebook earlier this year for providing misleading information about the ties between Facebook and WhatsApp prior to that merger’s completion. Additionally, both France and Germany fined the company much smaller amounts recently for improper use of customer data.

The nation of Belgium briefly blocked much of Facebook’s data-gathering efforts locally. A court struck this measure down. Given the EU’s structure, it is difficult for individual member states to regulate Facebook directly. However, it’s clear that there’s a groundswell in Europe about Facebook and it’s role as a communal institution.

Like it or not, Facebook’s large size makes it effectively serve as a public utility. These sorts of companies are typically heavily regulated and often are held to strict profit margins and tight operational constraints. Europe has gone after many of the American tech giants lately. They hit Apple Inc (NASDAQ:AAPL) with a huge tax penalty related to its Irish accounting. And the EU’s regulators slapped Alphabet Inc’s (NASDAQ:GOOGL) Google arm with a multi-billion dollar antitrust violation fine this summer.

On that note, Fortune’s Jeff John Roberts wrote that: “What’s less clear is whether their recent bold decisions are just a temporary burst of activity, or whether they amount to a long-term, existential threat to the tech behemoths. The fundamental worry […] is that regulators could use local laws to intrude in unprecedented ways into the firms’ operations—potentially putting an end to a remarkable streak of revenue growth.” That’d be bad news for FB stock in particular, and the tech sector as a whole.

American Political Optics

The political problems for FB stock don’t end on the far side of the Atlantic. As mentioned, hackers seem to have taken advantage of Facebook’s platform to influence the 2016 election. Given the high percentage of folks that rely on Facebook for news content, particularly millennials, Facebook’s brand will take a hit if they can’t stamp out so-called fake news and bot-driven persuasion techniques.

An investigation from Business Insider found almost a dozen politically-charged stories that garnered hundreds of thousands and sometimes even millions of Facebook views. The catch? These stories were all totally made up. Who knows how many gullible voters may have changed their voting intentions based on highly viral fiction.

Facebook is taking remedial measures to try to avoid such incidents in the future. The company just announced new measures that will tighten the standards for news sites that wish to profit off the site. Facebook will disallow monetized content for various forms of controversial stories and use far more fact-checkers.

In fact, the company is bringing on 3,000 new humans to deal with moderating its news stories. This brings up one of the issues with tech company profits going forward. In the wild west days of the internet, you could put everything together with a few engineers and rely on automation for the rest. But as Facebook supplants the traditional media, its quality standards have to go up. A lot. You can’t have a mere 95% accuracy rate if voters are counting on your website to be the gold standard. Traditional media organizations earn low profit margins in large part due to having a sizable employee payroll devoted to quality control. Facebook and its peers will need to do the same, lest the government slap them with onerous fines and regulations.

Facebook’s Profit Margins Are Going Lower

Given Facebook’s importance to society, they really need to up their game when it comes to political appearances. Just this week, reports surfaced that Facebook’s ad platform allowed advertisers to buy spots targeting users who self-proclaimed interest in the “Nazi Party” and “Jew haters” among other offensive search terms.

Obviously, a human-run ad agency would never have made this sort of basic outrageous oversight. Facebook has been relying on its algorithms to police this sort of thing, and it isn’t working. Again, they’ll need to hire more humans to provide adult oversight of their ad platform. It won’t come cheap.

If it doesn’t change its ways, Facebook will find itself on a collision course with increasingly irritable regulators. And that’s to say nothing of the doomsday scenario, which would be Zuckerburg running for President. Any such attempt would cause the mother of all investigations and hacking attempts into Facebook to try to discredit the platform that Zuckerburg built and might conceivably use to prop up his campaign.

It seems many owners of FB stock don’t take these concerns seriously. But the warning signs are mounting quickly. With decisive action now, Facebook can clean up its act – but profit margins would fall significantly. The alternative, more regulatory action against the firm, would likely end up with even worse results for FB stock.

At the time of this writing, the author had no position in any of the aforementioned securities. You can reach him on Twitter @irbezek.


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