3 Reasons Why Facebook’s Scandal Can’t Touch FB Stock

Public outrage over the social media company isn’t enough to derail the overriding positives for Facebook stock

facebook stock fb stock

Source: Shutterstock

Against the broader context, this year will go down as a bad one for Wall Street. That will be no comfort for Facebook (NASDAQ:FB). In addition to the broader market troubles, the social-media giant must also contend with massive PR scandals. Critics have argued that these self-inflicted wounds have sharply impacted FB stock.

It’s tough to deny the correlation. Since the start of the year, Facebook stock has dropped 30%. Against its all-time closing high, shares are down a whopping 43%. But the worst part is that the bulls have failed to overcome the ugly narrative.

In early spring of this year, The New York Times and The Guardian broke the Cambridge Analytica scandal. Long story short, FB facilitated a conservative research firm to data mine some of its users. The issue was that this occurred without the users’ knowledge.

The resultant anger sparked the #DeleteFacebook movement. It even sparked websites detailing how to accomplish exactly that.

Recently, the NYT broke another embarrassing expose. The news agency’s investigation discovered that Facebook allowed companies to “read, write and delete users’ private messages.” These companies include Netflix (NASDAQ:NFLX) and Spotify (NYSE:SPOT) — who have an obvious interest in user behaviors.

If that wasn’t ugly enough for FB stock, the company also allowed Microsoft’s (NASDAQ:MSFT) Bing search engine to view a user’s friends without consent. Apparently, Facebook allowed similar privacy breaches for Amazon (NASDAQ:AMZN).

Since the latest scandal broke, Facebook stock has suffered severe beatdowns. The incident also gave the entire social-media complex a black eye.

Nevertheless, this too shall pass — at least from an investment perspective — for three critical reasons:

Investors Quickly Forget Controversies

If you’re eyeing FB stock, but worry that this latest controversy will derail your investment, don’t. While I obviously can’t guarantee a smooth ride, I can almost certainly tell you that worry about the scandal is overblown.

A little over a year ago, I covered the Equifax (NYSE:EFX) scandal. If you don’t remember, Equifax failed its security protocol. As a result, 143 million people had their personal information compromised.

We’re not talking about inconsequential information, like where you eat your ice cream. Instead, cybercriminals stole vital stats, like social security numbers and birth dates. Such a massive breach will hurt Americans for decades, perhaps even generationally.

I don’t condone violence or any acts of intimidation. However, if people stormed Equifax’s headquarters with their pitchforks, I wouldn’t feel any sympathy. This was a horrific, unforgivable oversight.

But what happened to its share price? After suffering a complete meltdown, EFX worked its way back towards its former glory days. True, shares have again melted down, but this time due to the broader market weakness.

Could Facebook stock go against the grain and crumble? It’s possible, but I highly doubt it.

FB stock Is Too Big to Prosecute

On paper, the odds appear stacked against FB stock. You now have multiple allegations harping on the same privacy theme. Reading between the lines, Facebook has an abusive culture that turns a blind eye on unethical corporate-partnership profiteering.

But what they also may have is a viable defense. According to USA Today, “the social network said the partnerships didn’t give ‘companies access to information without people’s permission.’” The news organization further states that “Many users zip through user agreements and have said they don’t recall giving the companies the permission to read direct messages.”

I sympathize with the outraged. Nobody has the time to read through the litany of verbiage that keep corporate attorneys happy and gainfully employed. Ultimately, though, that’s no excuse for not reading the fine print. Yes, Facebook is gaming the system, but that in itself isn’t illegal.

But even if the company is guilty as charged, I’m not sure if Facebook stock will actually suffer. You’ve heard of big banks being too big to fail. In this case, FB is too big to prosecute.

As in similar cases, FB may end up paying a fine. But beyond that, I don’t think any institution will take the company to task. If you prosecute Facebook, you open the door to convoluted internet laws.

And let’s face it: internet operators are violating privacy regulations all the time. Taking down FB requires taking down its partners who engage in the same crime.

In other words, don’t hold your breath.

Facebook is Utilitarian and Ubiquitous

Investors should treat FB stock as a long-term buy because the social-media firm has integrated itself into nearly every corner of society. The platform is too useful and dominant to simply walk away from without incurring consequences.

For one thing, Facebook meets the true definition of a digital social network. With now 2.2 billion daily active users (across all platforms), the company features an unrivaled platform with broad demographic representation.

You can’t say that about the competition. Snap (NYSE:SNAP) clearly caters to younger audiences, and hasn’t generated traction with the older crowd. Twitter (NYSE:TWTR) has a wider user base than Snap, but can’t touch Facebook stock on sheer numbers.

Interestingly, both companies have taken a dive in December, so neither has advantaged Facebook’s PR crisis.

More importantly, Facebook is everywhere. While a vocal few may permanently delete their accounts, that’s not going to impact FB stock indefinitely. Any major business these days has a social-media presence. If they do, they have Facebook. It has the numbers, the demographic diversity, and the international exposure that other platforms lack.

This fundamental tailwind will not change for at least several years. So while you may not like Facebook news, remember that FB stock is essentially a separate entity.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/12/3-reasons-why-facebooks-scandal-cant-touch-fb-stock/.

©2019 InvestorPlace Media, LLC