Facebook Inc (NASDAQ:FB) is getting stung on data breach concerns. On Monday Facebook stock fell more than 6.7%. If the markets closed right now, marking Facebook stock’s worst day since 2014.
The catalyst bringing down Facebook stock is a bit complex. It involves the unlawful use of Facebook data on 50 million users by a third-party data analytics firm. It dates back to 2015. And it has a political slant, which is never good.
But in the grander scheme of things, this data scandal is much ado about nothing for Facebook stock.
This is a 3-year-old issue that is hardly relevant today. It was also a one-time issue that was the fault of a Cambridge professor, not Facebook. The data was only compromised after users consented to give their data out. There is an easy-fix for data protection through implementing tighter data controls. And there shouldn’t be any advertisement or user fallout in the near or long term.
Overall, then, this is really just a minor blip on the radar for Facebook stock. Meanwhile, the stock has plunged into deep value territory. Buyers on this dip should be rewarded in the near and long terms.
Here’s a deeper look.
The Cambridge Analytica Data Scandal
According to Facebook, a University of Cambridge professor named Dr. Aleksandr Kogan created an app in 2015 that he advertised as a personality test. This app naturally wanted access to Facebook data for each Facebook user that downloaded it.
Approximately 270,000 people downloaded Kogan’s app. All 270,000 consented to sharing information with Kogan. Kogan then passed that information onto a third party (Cambridge Analytica), a move which directly contradicted Facebook’s Platform Policies. Facebook learned about this policy breach in 2015. They removed Kogan’s app from Facebook, and demanded certifications from all involved parties (Kogan and Cambridge Analytica included) that all data had been destroyed.
Facebook received such notifications. Life moved on as normal.
Recently, though, reports have surfaced that not all of that data was deleted. Worse yet, there is a political slant here. Donald Trump’s campaign reportedly used that “stolen” Cambridge Analytica data on 50 million people for targeted advertising in the 2016 Presidential Election.
Why It Doesn’t Really Matter
The headline “Data Firm Uses Stolen Facebook Data On 50 Million People To Help Trump Win Election” is an awful headline.
But that’s all it is. A headline.
The whole thing seems to be blown out of proportion. Firstly, all the data compromised was compromised only after users consented to give that data. As Facebook correctly points out:
Aleksandr Kogan requested and gained access to information from users who chose to sign up to his app, and everyone involved gave their consent. People knowingly provided their information, no systems were infiltrated, and no passwords or sensitive pieces of information were stolen or hacked.
Moreover, this whole data scandal happened 3 years ago. Facebook has since tightened up its data protection and sharing system. Now, all apps requesting user information must go through Facebook’s App Review process first. This process requires developers to not only justify the data they want to collect, but also justify how they will be using that data. This all happens before third-party apps are even allowed to ask users for their data.
If and only if Facebook approves apps can they then request user data — from users.
Thus, Facebook data is protected behind two very tight controls. The first is a reviews system that filters out bad actors. The second is an opt-in mechanism, so that users don’t have to share their data unless they specifically want to.
As a Facebook user, I feel pretty safe with my data locked behind those two controls.
I think most Facebook users will feel this way, too.
Historically, Data Breaches Have Had Little Effect on Social Media Use
Twitter Inc (NYSE:TWTR) had a sizable data breach in mid-2016. But monthly active user growth on Twitter actually accelerated in the back-half of 2016 versus the first-half of 2016. Snap Inc (NYSE:SNAP) was hacked back in late 2013, and that was before user growth took off like a rocket ship. In 2012, LinkedIn was the subject of a big hack and a ton of criticism from politicians. That didn’t slow down LinkedIn’s explosive user growth.
Even Facebook has had a data breach before, most notably in 2013. Since then, Facebook’s monthly active user base has gone from just over 1 billion to over 2 billion.
In other words, social media usage has historically been largely immune to data breaches. So have advertising revenues. In all the aforementioned cases, the data breaches did not affect revenue growth. And that makes sense. After all, if usage on the platform doesn’t go down, then why would advertisers stop pumping money into the platform?
Bottom Line on FB Stock
The worst thing that happens here is regulators crack down to bring more transparency and controls into Facebook’s black box of data. If that happens, so what?
Facebook will still have an unprecedented 2 billion users. They will still have an unprecedented amount of data on those 2 billion users. And they will still be able to leverage that data to deliver the best and most targeted digital advertising products in the world.
For bears concerned about the sustainability of Facebook’s massive ad revenue business, I suggest you read this article from CNBC. It’s essentially a bunch of ad industry insiders saying nothing has changed about Facebook’s digital ad market dominance over the past several months, despite fears that lower daily engagement and fake news would cause advertiser churn.
If Facebook does indeed maintain control of the secular growth digital ad market, then the stock is dramatically undervalued at less than 24-times forward earnings.
As of this writing, Luke Lango was long FB and SNAP.