We Can’t Afford to Regulate Facebook Amid the Tech Cold War

With adversaries admitting their desire to overturn U.S. tech dominance, punishing our own makes zero sense

There used to be a time when Facebook (NASDAQ:FB) was merely interested in dominating social media. Even though this was just a few years ago, it almost seems like a different era altogether. Today, Facebook stock is almost unrecognizable from when it first launched as a publicly traded company.

FB Stock: We Can’t Afford to Regulate Facebook Amid the Tech Cold War
Source: Shutterstock

Naturally, many folks view this as a negative. While respecting the tremendous run up in the Facebook stock price, bears reference the law of large numbers. At a certain point, a growth name simply becomes too big. Impressing from this elevated position requires a perhaps impossible revenue tally.

Bad News Follows FB Stock

We already saw how this dynamic could negatively and dramatically impact FB stock. Shortly after shares hit record highs, they quickly collapsed. The reason? A poor showing in the social media giant’s second-quarter earnings report.

As I argued at the time, the numbers themselves weren’t bad. For instance, analysts pegged the consensus target for Q2 revenue at $13.36 billion. FB delivered $13.23 billion, which is within 1% of hitting the forecast square on. Additionally, the company “only” brought in $9.32 billion in the year-ago quarter.

What other investment besides Facebook stock experiences a hemorrhaging following a 43%-plus sales lift? I’d say the list is extremely short, perhaps exclusive.

Moreover, FB stock trades under the specter of increasing regulation. It’s a matter that also clouds organizations like Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN). Having gained immense power and influence, federal regulators are worried that too much of these attributes are concentrated in the hands of an elite few.

Regulation isn’t an inconsequential issue as most Americans are concerned about their online privacy. For instance, a Pew study revealed that 91% of Americans either agree or strongly agree that that people have lost control over their digital footprint. Additionally, half of our fellow citizens do not trust the federal government or social media sites to protect their data.

That’s quite an indictment, and unfortunately, this discourse eventually centers on FB stock. After all, the media plastered Facebook’s name across multiple controversies. First came the Cambridge Analytica fiasco, which implied that the company inadvertently helped President Donald Trump’s 2016 campaign. Then came accusations that Facebook allowed partner companies to read their users’ private messages.

It all sounds terrible. However, it’s unlikely that any of these controversies will derail Facebook stock.

Investors Must Read Between the Lines

I’m not making that statement lightly. I don’t personally know Facebook CEO Mark Zuckerberg nor any of the company’s high-profile executives. But it’s safe to say that they probably yawn every time politicians have leveled harsh criticisms toward their monopolistic business.

However, they won’t yawn if the federal government actually backed up the rhetoric with meaningful action. While we really haven’t seen many instances where Uncle Sam forced giant conglomerates to break up, it’s not without precedent.

And a coerced break-up is one aspect of this regulatory cloud that surely keeps Zuckerberg up at night. This is the young man who once turned down $1 billion from Yahoo. Personally, I wouldn’t have the conviction to do such a thing at any age. Give me half that and I’ll be on my merry way!

Thus, you can expect Zuckerberg to fight tooth and nail regarding any attempt to dissolve Facebook. Taking unfathomable risks to grow the company to where it is now, he’s not in a position to back down.

But that’s not the primary reason why I’m bullish on FB stock remaining as it is. Currently, we’re living in a dangerous time from a geopolitical standpoint. With the rapid rise of China, and an increasingly belligerent Russia, our status as the global alpha dog is not assured.

And contrary to President Trump’s many rants — on Facebook rival Twitter’s (NYSE:TWTR) platform — we’re not winning in many areas. A big source of anxiety is our declining presence in science and technology. If we cannot improve as a nation, we have several competitors that would love to take over.

In that context, we must do everything we can to protect our core assets. The Feds going after our own companies and weakening them is not a part of that strategy.

Facebook Stock Is a Monster We Must Deal With

Rather than fight Facebook, and by logical deduction, Facebook stock, we should support this phenomenon if for no other reason than identity politics: FB, while a monster, is our monster.

Here’s what I mean. China has a cohesive strategy to leapfrog the U.S. in artificial intelligence by the year 2030. I want you to really think about the implications of the Chinese Communist Party taking point over one of the most critical components of the broader technology industry.

Then, I want you to consider what Russian President Vladimir Putin had to say about AI. At a student conference two years ago, Putin declared:

“Artificial intelligence is the future, not only for Russia, but for all humankind … It comes with colossal opportunities, but also threats that are difficult to predict. Whoever becomes the leader in this sphere will become the ruler of the world.”

Putin is many things, but stupid is not one of them. In fact, he like the Chinese have been developing plans to overtake U.S. technological and geopolitical hegemony for years.

Fortunately for now, our adversaries are just dreaming. Decisively, we’re leading in AI and other core technologies of tomorrow thanks to companies like Facebook, Intel (NASDAQ:FB) and Nvidia (NASDAQ:NVDA), among several others.

As I’ve argued for AT&T (NYSE:T), some companies are too important for our national security. For instance, I don’t anticipate the government cracking down on AT&T any more than they have to. That’s because the 5G network is a vital pathway for future innovations. Indeed, virtually all technologies, whether AI, cloud computing, automation or robotics will somehow involve 5G.

Therefore, it doesn’t make any sense for the feds to stymie AT&T. I have the same argument for FB stock.

FB Owns a Critical Moat

While federal regulators are eyeballing Facebook stock and its ilk, I can guarantee you something right now: they’re much more worried about what the Chinese and Russians are cooking up in their labs.

I think this is a great reminder, especially for younger investors, that we’re not all the same. Every time I travel abroad, I am always grateful to fly back to American soil. Naturally, you don’t truly appreciate what you have until you lose it.

Suffering an online privacy violation is no small matter. But it’s far worse to arbitrarily lose your human rights, or to suffer political (or even physical) assassination. These are incidences that happen frequently in China and Russia, despite what their bought-and-paid-for trolls have to say.

I bring this up because the government must address the most pressing threat. For all his faults and idiosyncrasies, Zuckerberg does not represent an existential threat to our rights and freedoms. But we can lose these things if we fall to second place regarding critical technologies.

And this is why I believe the regulatory noise that we’re hearing is still hot air. At the end of the day, we need FB.

Before anyone can integrate artificial intelligence, they must first have a sizable pool of natural intelligence. Since AI mimics human intelligence, not having access to the latter component is a deal-breaker.

And this is why Facebook stock is such a vital investment. No one, not Twitter, not Snap (NYSE:SNAP), not even China’s WeChat has Facebook’s clout and extensive reach. This goldmine of human intelligence that can catalyze an unprecedented AI platform exists right here in America.

When we’re falling behind in so many other areas, Facebook is our vital lifeline. Threatening it with a breakup is counterproductive to our national interests.

Only Facebook Can Develop a Comprehensive AI Solution

One of the key selling points for Facebook stock in terms of AI is diversity. Admittedly, out of all the social media sites globally, WeChat poses the most competent challenge to FB. Levering over one billion users, WeChat and Facebook are the only two social media companies to cross that threshold.

But if WeChat were to compete with FB on AI solutions, it would have a major problem: a lack of diversity. For instance, most of WeChat’s users are Chinese. You can surmise that from the company’s penetration rate in China, which stands at nearly 86%.

On the other hand, Facebook has broader coverage. Its penetration rate in the U.S. is 72.4%, which suggests further growth opportunities in the native market. More importantly, FB has double-digit penetration rates in every region of the world.

Why does this matter? If you’re going to lead in AI, you can’t just mimic one segment of the world population. After all, human intelligence is such a rich and even controversial issue. How one societal group thinks and reacts could be completely different to another.

Here, Facebook, and by logical deduction FB stock present obvious advantages. With a two billion-plus user base, simple math tells you that a majority of Facebook’s active users aren’t American. That means the company isn’t just sitting on a domestic data gold mine, but an international one.

Of course, this diverse pool offers compelling geopolitical advantages. But thinking down to the commercial level, FB has a clear leg up. Through their extensive data, the social media firm can better pinpoint what sells in different countries, and what doesn’t.

That’s the power of having a globally recognized and respected brand. Therefore, I doubt that the one entity to take down this lucrative Goliath is our own government.

FB Has a Unique Role in Fighting Fake News

By now, we’ve all heard the term “fake news” uttered so much that it may have lost its original “oomph.” As President Trump seemingly defines it, fake news is anything with which you don’t agree.

But while the concept may be a punchline here, it’s serious business abroad. For example, Chinese trolls are always on the prowl, doing Beijing’s bidding online. And we’re not just talking about inundating public forums with false information, though that certainly exists. Rather, trolls have taken on a more direct and disruptive approach.

For instance, CNN reported a story in April about a coordinated attack on a Facebook site supporting China’s Uyghur population. The Uyghur people are a largely Muslim group and are located in China’s far-western region of Xinjiang. However, they clash with the dominant Han Chinese group.

Subsequently, Chinese authorities routinely violate the Uyghur people’s human rights with impunity. Several grassroots sites exist to bring awareness to this relatively little-known crisis. Naturally, Beijing wants to keep the turmoil under wraps, deploying trolls to control the narrative.

When it comes to combating fake news and misinformation, Facebook has been caught on the wrong side of the tracks. But they’re making up for prior shortfalls with a more effective censoring protocol.

I concede that such an approach isn’t without controversy. Conservatives have argued that social media sites unfairly target them, and they may have a point. At the same time, Facebook has successfully eliminated several genuine bad actors.

Over the long run, I expect them to bolster their anti-fake news platform. Not only does this improve the user experience, it mitigates Chinese and Russian digital attacks. As I’ve established, these adversarial nations present a far greater threat to our way of life than Facebook stock.

China Doesn’t Play by the Rules and Neither Should FB

Facebook co-founder Chris Hughes wrote a powerful op-ed for The New York Times. In it, Hughes described all the reasons why the government should break up FB stock. As someone who has worked at the social media giant from the get-go, his opinion has substantial weight.

Nevertheless, I think he’s dead wrong and painfully naïve about the national security implications for Facebook stock. If the government forcibly breaks up the company, it would only please China and Russia to no end.

How do I know this? Because they gleefully and mockingly admit their agenda. Indeed, Hughes wears the same rose-tinted glasses that many Americans do when discussing China. They view the nation merely as an eastern competitor. It’s far deeper than that.

China seeks to dominate the world, and they’ll go through any means to attain this goal. Do you think that when Chinese President Xi Jinping referenced the “long march” during the recent trade war tensions, he was merely talking about the current state of affairs? No. Clearly, his eyes are focused on a much more comprehensive prize.

Thus, if we lose the technological race, we cannot regain that position as easily as Hughes implied. Primarily, that’s because we’re a nation of laws. In contrast, China is a nation of lawlessness. I realize that sounds incredibly harsh. But again, the Chinese will do anything to win the tech race.

Consider the Micron Technology (NASDAQ:MU) espionage case. Chinese agents blatantly stole intellectual property from Micron regarding proprietary memory-chip technology. The New York Times’ description of the incident reads like a made-for-Hollywood script.

Except that it’s all too real. If we can’t trust the Chinese to follow the rules — and let me reiterate that we absolutely cannot trust them — then we shouldn’t hamstring our own companies to further disadvantage.

American Virtue Becomes a Vice, or at Least a Liability

Hughes makes a strong point that the Founding Fathers resisted tyranny in the political space. Therefore, it makes zero sense that we would accept it in the economic realm.

As further evidence, the markets respond well to free competition. Without breaking up the old AT&T, we may not enjoy the smart-device conveniences that we take for granted today.

Fair enough. It’s reasonable to believe that if the U.S. Constitution defends our freedoms, it should also defend free commerce. A monopoly like Facebook stifles competition and does not align with our sacred traditions.

However, the Founding Fathers never addressed how to overcome an adversary that consistently breaks the rules. To have any semblance of an equitable platform, we too must ignore established protocol and mandates.

Of course, that’s not going to happen. We as Americans will stick to our virtues come hell or high water. But in dealing with an amoral entity, such absolutism is a liability.

Admittedly, I don’t think we have ready-made answers to address the China and Russia threats. But what I can tell you is that we cannot afford to punish our biggest and brightest tech firms. We live in an ugly world, competing with dirty players. Despite this, we can still hold to our values. However, we should give no favors to the opposition.

Logically, this means letting FB off the hook for anti-competitive behaviors and privacy breaches. I get it. It doesn’t sound right. Indeed, some folks might call it — like Hughes does — un-American.

Sadly, I don’t think we have a choice. When our opposition places zero premium on moral standards, we ourselves can’t hold onto them too tightly.

Trump Is Right on Two Counts

Over the past two-and-a-half years, I’ve learned to tune out most of what President Trump has to say. In part, it’s hard to pinpoint exactly what he thinks. And on another level, he sometimes comes off as that crazy uncle spewing conspiracy theories at the dinner table.

But where I find myself agreeing with the President wholeheartedly is his stance on China. After looking at this issue from all angles, I’ve realized this: it’s better to nip this in the bud as early as possible.

Because what is the alternative here? Let the Chinese do whatever they please? Well, let’s face it: they’ve been doing exactly that. As I just mentioned, they stole vital technology and information from Micron. And that’s just one case out of many.

By putting China on notice, Trump let them know that their dirty and illegal tactics won’t work. Now, the Chinese must decide if their nearer-term economy can survive their longer-term ambitions.

Second, Trump is also correct (in a way) to call out European regulators for fining American tech firms. True, the regulators are merely doing their job. However, I appreciate that Trump is at least sticking up for our tech industry. As problematic as the industry is, it’s a key American asset.

Hurting it only hurts our longer-term interests.

This sentiment goes back to my point about FB and Facebook stock. We’re not talking about a perfect situation, or even a pleasant one. Clearly, Zuckerberg and company have failed the American public on many counts.

But we’re also at a juncture where we need him — and people like him — the most. Killing that drive could be the most un-American thing of all.

FB Stock Is Too Important to Fail

As we discussed, federal regulators have every right to investigate Facebook for anti-competitive practices. If we lived in a world where China and Russia didn’t exist, I’d say let the regulators have their way with FB stock.

But we don’t live in that world. Instead, as global leaders, we have a target on our back. However, the difference this time around is that our adversaries have a legitimate pathway to overtake us. I think I speak for every rational American that such a circumstance is completely unacceptable.

Therefore, we’ve got to do everything we can to prevent this greater power from materializing. Answers won’t come easy. But we certainly can’t afford to stymie the creative impulses of our most dominant institutions.

Doing so doesn’t just hurt Facebook stock. It also gives an undeserved shortcut to our greatest adversaries.

As of this writing, Josh Enomoto is long T stock.


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/we-cant-afford-to-regulate-facebook-amid-the-tech-cold-war-fb-stock/.

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