The HUD Lawsuit Shouldn’t Shake Your Confidence in Facebook Stock

The lawsuit’s implications don’t have the teeth to truly hurt Facebook stock

If there’s one company that just can’t afford another ugly controversy, it’s Facebook (NASDAQ:FB). After a tumultuous year involving politics, privacy complaints, and executive-level infighting, Facebook stock simply needs a break. Unfortunately, the Department of Housing and Urban Development (HUD) had other ideas.

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On Thursday, the federal agency filed a housing-discrimination lawsuit against FB. HUD alleges that the social-media giant allowed landlords and real-estate brokers to exclude certain demographics from accessing housing advertisements.

According to HUD Secretary and former presidential candidate Dr. Ben Carson, “Facebook is discriminating against people based upon who they are and where they live.”

Facebook Issues Past

If true, this lawsuit presents another daunting PR obstacle for Facebook stock. In last year’s Cambridge Analytica fiasco, several users viewed the incident as helping President Trump’s campaign. Of course, such inferences were anathema to Facebook execs, who tend to lean politically left.

But through public-rehabilitation efforts and the passage of time, the social-media firm stabilized the turbulence. Not surprisingly, FB stock has moved higher on the sentiment, with shares currently up over 28% year-to-date. Needless to say, this new controversy threatens to undo all their prior work.

But it’s worse than that. For one thing, this is not Facebook’s first rodeo with housing-discrimination charges. In August of last year,  HUD filed an administrative complaint over targeted ads. Additionally, the company reached a costly settlement with social-advocacy groups. Part of the terms involve Facebook no longer allowing “housing, employment or credit ads that target people by age, gender or zip code.”

Here’s the thorny issue, aside from the ugly discrimination overtones: FB stock is an investment in digital advertisements. Cost- and engagement-effective ad campaigns require at least some demographic selectivity.

How then will Facebook stock survive this latest shocker?

Facebook Stock May Get a Reprieve Here

On the surface, everything appears to be working against FB stock. The underlying company has already fielded ugly charges of facilitating Russian trolls to disseminate fake news. After the furor over that and related issues faded, we now have HUD breathing down its neck.

This time, though, I don’t think the markets will witness the same outcry and commotion. No one will propose to #DeleteFacebook over its housing-discrimination allegations. Why? Because if we’re being completely honest, housing discrimination occurs all the time.

In San Diego, it’s extremely common to see advertisements of all industries proclaim, “Se Habla Español.” You can read between the lines. With English as our de facto official language, such advertisements target a specific community.

Of course, these ads aren’t discriminatory because they don’t exclude members of other communities. That’s an important distinction to keep in mind when analyzing Facebook stock. Still, these ads allow marketers to address specific demographics without saying as such.

Go to Los Angeles and the situation becomes even more diverse and eclectic. Nevertheless, the message remains the same: buy from me because I share an immutable characteristic with you.

And you know what? This thought process happens every hour, every minute, every second. That’s why a couple years ago, Reuters reported that many Americans have no friends outside their own race. Are these folks racist? I highly doubt it.

The simple reality is that people associate with whom they are most familiar. Thus, I wouldn’t agree with the markets penalizing Facebook stock over the HUD lawsuit. In this case, the company merely stepped over a technical line they shouldn’t have. But throughout America, people target based on demographics consistently and frequently.

They just don’t have the liability of mass oversight.

The Bottom Line on Facebook Stock

As far as the issue regarding changes to Facebook’s advertising model, I admit the discrimination lawsuits provide no favors. However, we should also keep in mind that the company, by its mere existence, offers profound reach and opportunities. Rivals such as Twitter (NYSE:TWTR) and Snap (NYSE:SNAP) don’t have Facebook’s expansive networks.

So yes, advertisers may shy away from Facebook, which in turn hurts FB stock in the nearer-term. They may also place some distance due to the discrimination-based controversies. But at the end of the day, only one social-media platform leverages more than two-billion active users.

Thus, advertisers will play ball with FB no matter what because of one fundamental truth: the company is in the driver’s seat. And while this lawsuit certainly detracts from the investment thesis, it doesn’t derail it. That’s the key difference I see, which benefits the patient.

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

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