The troubles continue for Facebook (NASDAQ:FB). Facebook stock has had its worst year since its initial public offering, as allegations of data misuse continue to plague the company. Those allegations have already contributed to a decline in the Facebook stock price of over 35%.
Now yet another threat has surfaced, this time from the U.K. Specifically, a British parliamentary committee has released data that could create trouble for FB stock.
However, historically such revelations have proven bearish in the short-term and bullish over the long-term for large companies. Facebook stock appears to have followed this same pattern, so investors should use the current weakness of FB stock as a buying opportunity.
A New, Data-Related Threat Has Surfaced
The latest allegations come from a member of the British Parliament named Damian Collins. As the chairman of the House of Commons Digital, Media, Culture, and Sport Committee, Collins has obtained documents from a now-defunct app developer, Six4Three LLC.
Collins released the 250 pages of e-mails last week. They highlighted tactics FB used to deal with competing apps. The e-mails indicate that Facebook used its dominance to block competing apps from accessing data. This tactic often put competitors such as Six4Three LLC out of business.
Facebook Stock Will Bounce Back
Despite these potentially damning allegations, the news did not lead to a sustained selloff of FB stock. This could be a bullish sign, as such events tend to create short-term bearishness in equities. Additionally, headlines fade in time, and I think, in the end, this focus on data will help Facebook stock.
Perhaps Mr. Collins will further humiliate the company. Maybe he will even force FB to pay a multi-billion dollar fine.
However, other companies have bounced back from similar challenges. Microsoft (NASDAQ:MSFT) faced similar issues in the 1990s when its operating systems monopoly resulted in legal scrutiny. MSFT stock fell for a time. However, the company moved past these problems, and its stock bounced back. I believe Facebook stock will follow the same pattern.
Investors should also realize that FB holds tremendous cash reserves. With over $41 billion in cash, Facebook can pay any reasonable fine and even many unreasonable ones.
Moreover, for social media needs, Facebook has become dominant, except in China. As Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) found out the hard way with Google+, launching an alternate site will not supplant FB. More than two billion people use a Facebook-owned site every day. No other social media company comes close to that figure.
Of the existing sites, Twitter (NYSE:TWTR) remains tied to the limits of short posts. LinkedIn focuses mostly on career interests. Snap (NYSE:SNAP) doesn’t have many users beyond its teen base. Weibo (NASDAQ:WB) does not operate outside of China. None of these firms threatens the position of FB.
Tight Regulations Will Help, Not Hurt Facebook Stock Price
Moreover, stricter data standards such as the EU’s General Data Protection Regulation (GPDR) end up hurting only small firms. Due to the high compliance costs of these regulations, only large companies such as Facebook can afford the legal team necessary to cope with them. Once investors see that rules designed to rein in Facebook are actually positive for Facebook stock, Facebook stock price should climb.
As I pointed out in previous articles, Facebook’s financial metrics create a compelling positive case for Facebook stock. The price-earnings ratio of FB stock is 21.3, making Facebook stock price ridiculously cheap, given its high growth rates. Also, FB owns Instagram, Messenger, and WhatsApp, which each attract more than 1 billion users. Once the company learns how to better monetize these sites, increased profits should propel Facebook stock price to increasingly higher levels.
The Bottom Line on Facebook Stock
The latest data misuse allegations will not only fail to harm Facebook, but they will also make the company use its data more carefully. Any decline in Facebook stock price based on the allegations will create a buying opportunity.
Some fear that more legal scrutiny will curtail Facebook’s business and harm FB stock. However, companies such as Microsoft faced similar issues, and MSFT stock always bounced back. I believe Facebook stock will follow the same trajectory. If history does not persuade investors, the cheap valuation and high growth of FB likely will.
To be sure, the allegations could still hinder FB stock in the near-term. Still, in the end, the winners of this battle will likely be the owners of Facebook stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
