Facebook, Inc. (NASDAQ:FB) stock has trouble, and so do its investors. Facebook now has a myriad of Federal government inquests into its collection and use of customer data relating to election campaigns.
The basic issue is that as users download the company’s app on their smartphones or tablets or even use Facebook’s website on their laptops, FB begins gathering a treasure trove of information on those users. This information is far-ranging, from location to demographics as well as shopping and web browsing data. And it keeps going, as Facebook also follows and tracks postings and newsfeeds.
And for mobile phones, Facebook also can and has tracked phone logs and other communications made by users — in real time.
All of that information is then sorted and parsed so that Facebook has a pretty good idea of what sorts of things users are interested in to read, purchase or to take action within their social circles. This is more valuable than gold for marketing companies.
Marketing companies in turn are eager to pay for this information to peddle ads for their own customers. And as political campaigns are merely another form of marketing, Democrats and Republicans have their operatives at the ready to utilize demographic and behavioral information to either rally support or subvert opposition.
This isn’t just about the 2016 general election, as it has been done for many years, including the successful presidential campaigns of 2008 and 2012.
The difference today is that the losers of the 2016 election are more than hopping mad — they want to reveal the dirty truth that Silicon Valley has been operating this near-clandestine business that aided the electoral victors.
But none of this is new.
And Facebook is not alone. Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google utilizes the same data collection and algorithms that are used to get a good idea of their users, which in turn is used to target ads on websites as well as on its YouTube operations.
What’s more, every other online company — including Amazon.com, Inc. (NASDAQ:AMZN) — as well as every single app that you have on your smartphone is monitoring you and your activity and peddling access to your information.
And the adage concerning website and app usage that “if you’re not paying for it, you’re the product” holds true even if you do pay a nominal fee or subscription.
The end result is if the U.S. Federal Trade Commission (FTC) as well as numerous state Attorneys General do fully go after Facebook for a lack of data privacy, the core of the company’s revenues will simply be in severe jeopardy. And with Alphabet relying on ad revenues for the vast majority of its sales, its stock will be a massive risk for its shareholders, too. The same will be for every digital platform company.
If you want to see the impact this could have on the market for innovation and development of online companies, just look at the European Union, which has increasingly draconian rules on data collection and dissemination. The effect is that for much of Europe under European Commission rules, it’s hard to name a major competitor for Facebook, Amazon, Google or other juggernauts of the online commerce market.
Moreover, with these companies so embedded in the major U.S. stock market indexes and exchange-traded funds (ETFs), the risk of further massive sell-offs not just in these stocks but general ETFs is mounting, as we saw in last week’s trading in the stock markets.
The safety mechanism for investors is to finally understand the embedded risks in these data-driven companies and their up-until-now high-flying stocks and to move more assets into the safety of real world companies — particularly those that focus on consistent and rising dividends.
And of course, that’s what you’ll find consistently in the pages of Profitable Investing.
As of this writing, Neil George did not hold a position in any of the aforementioned securities.