Facebook, Inc. (NASDAQ:FB) is watching you — and has been for quite some time. Now, it seems more and more people are starting to believe that this is not such a good thing. The result is that Facebook stock has been taking a beating, dropping from $185 to $156 since mid-March.
The catalyst: Last month’s blockbuster revelation about former partner, Cambridge Analytica. The allegation is that the company scoured about 50 million Facebook profiles without permission. These were then leveraged for the 2016 Presidential campaign, on behalf of Donald Trump.
It’s true that there is irony about all this. Let’s face it, users really should not be surprised that their data is the fuel for social media platforms. In light of this, it’s inevitable for there to be breaches, violations and misappropriations.
If anything, the Cambridge Analytica situation probably just starches the surface of the muck — and there is likely to be more pressures on Facebook stock. Hey, not long after the Cambridge Analytica revelation, we then found out that the company was also monitoring smartphone activity in real-time, without consent.
Facebook Stock and the Potential Regulations
In Facebook’s pursuit of growth, the company has been lax when it comes to data usage. Just look at a recent memo from a company executive. He writes in Orwellian language that “the ugly truth is that we believe in connecting people so deeply that anything that allows us to connect more people more often is *de facto* good.” This is the case even if “it costs a life by exposing someone to bullies. Maybe someone dies in a terrorist attack coordinated on our tools.”
It’s really chilling. But it is also realistic. Again, we should not be surprised by any of this.
But it also seems reasonable that FB stock will come under more pressure from regulatory efforts. According to salesforce.com, inc. (NYSE:CRM) CEO Marc Benioff: “I think that you do it exactly the same way that you regulated the cigarette industry.”
Interestingly enough, former FB executives — like Sean Parker and Chamath Palihapitiya — have also talked about the dangers of social media.
Already Capitol Hill wants action and there is an investigation from the Federal Trade Commission (FTC) as well as state Attorneys Generals across the US. And yes, there is likely to be pressure from other countries. Note that Europe has been rolling out new privacy regulations, called GDPR (General Data Protection Regulation), which will likely crimp the growth rate of FB.
Although, the company is also making moves at self-regulation. It has implemented new measures to protect data and has limited transfers with third-party marketing data brokers, such as Acxiom Corporation (NASDAQ:ACXM) and even Oracle Corporation (NYSE:ORCL).
Oh, and FB plans not to release its new smart speaker at the F8 developers conference. As InvestorPlace.com’s Brad Moon has noted: “Given the crisis the company finds itself in over data privacy, launching an always-on, always-listening Facebook smart speaker equipped with a face recognizing camera for video chat is pretty much a non-starter.”
Bottom Line on Facebook Stock
Over the years, FB CEO Mark Zuckerberg has dealt with many issues and challenges. But this time seems different. FB has become a global juggernaut, yet has not been proactive enough to reign in its power.
Now, the company’s core business model is under threat.
After all, advertisers pour money into FB ads because of the data-targeting capabilities. So if regulatory moves result on lower ROIs, this should mean a lower growth rate. In other words, given all the uncertainty, there’s really no need to rush in buying Facebook stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.