New Zealand privacy commissioner John Edwards recently tweeted that Facebook (NASDAQ:FB) are “morally bankrupt pathological liars.” While it didn’t do anything to the price of Facebook stock, it is something that investors have dwelled on for some time.
Is it a real or imagined threat to the company’s stock?
Here are my arguments for both sides of this grave question.
It’s an Imagined Threat
Mr. Edwards needs to take a Business 101 class.
Facebook is a corporation. It’s a legal entity that exists solely to enable the company to do business within a structure that’s tax efficient and protective of Facebook’s assets. End of story.
Now, if Mr. Edwards wants to ask if Mark Zuckerberg and the rest of Facebook’s employees are morally bankrupt, that’s an entirely different question.
In my opinion, Facebook is a massive timewaster like most social media. That doesn’t mean it shouldn’t exist. I do like the fact I’m reminded of people’s birthdays. I’m forgetful, not to mention disorganized, so it does help, but beyond this reminder service, I’ve no need for it.
However, millions do. Hence, the company’s humongous advertising revenues.
Zuckerberg has admitted that the company could have done a better job stopping the live streaming of the horrific New Zealand mosque attack by adding a time-delay.
“That was a really terrible event,” Zuckerberg said about the terror attack. “We need to build our systems to be able to identify livestream terror events more quickly.”
Edwards didn’t like Zuckerberg’s answer suggesting it was the CEO’s way of sweeping the issue under the rug.
I don’t believe so.
The company uses artificial intelligence to find cases of suicide, murders, sexual assault and other graphically offensive videos on the site and removes them as quickly as possible. Unfortunately, AI involves computers learning on the fly, which means it needs to see more of this kind of video before it can accurately and efficiently recognize them.
To suggest that Zuckerberg and the employees of Facebook have some perverted sense of right and wrong is wrong. And Edwards, as privacy commissioner, knows this.
So, Mr. Edwards, unless you can prove that Zuckerberg et al. are morally bankrupt, you might want to tone down the rhetoric.
Is Edwards’ accusation a real threat to Facebook stock? I don’t think so. Here’s why.
Zuckerberg has said time and again that Facebook is intent on improving user engagement. Except for morally bankrupt people like the New Zealand shooter, its users aren’t interested in viewing this kind of tragedy in real time.
You don’t become a $500 billion company without understanding a thing or two about your users. It’s a sideshow that will go away as fast as John Edwards’ 15 minutes of fame.
Terrorism and Facebook Stock
If John Edwards’ accusation is accurate and the employees of Facebook are found morally bankrupt, you can bet your bottom dollar given the rise of ESG investing, that institutional investors will abandon Facebook stock faster than you can view one of these horrific videos.
Statistics show that companies with one or more controversies surrounding them underperform those that are free of controversy. A recent report by European asset manager Ossiam elaborates:
“Results showed that between January 2010 and September 2018, controversial equities in Europe and the US significantly underperformed non-controversial stocks by 7.4% in euro terms and 7% in US dollar terms respectively…This phenomenon is attributed to strong market reactions that penalize stocks as a consequence of controversy rating downgrades. These equities tend to show a slow recovery in price. The research findings are a strong argument for exclusion of stocks with high controversy scores from investment universes.”
You might wonder why Facebook hasn’t done more to protect its users, both in terms of privacy concerns and viewer experiences, but that’s an incredibly complex question.
As Zuckerberg also stated about adding a delay to live streams, its users won’t be nearly as engaged if their videos aren’t real time, which reduces the amount the company can charge for advertising. It’s a slippery slope.
If Facebook can’t figure out how to bring some balance to this equation, it’s possible that investors will abandon FB stock.
The Potential Hit to Facebook Stock
I’ve written about investments for more than a decade. The one constant I’ve found is that investors overreact to good and bad news with equal vigor.
As in life, the highs aren’t quite as incredible as we’d like to think, and the lows aren’t nearly as devastating as we imagine. In general, we tend to live our daily lives in the middle, where things are neither fabulous or awful.
It’s a lot like driving. Sometimes you go fast; sometimes you’re stuck in traffic at a standstill. That’s life. Ultimately, Edwards’ comments are much ado about nothing. This too shall pass. If you own FB stock, there’s no way you should let this scare you out of your position.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.