Image Source: Christopher
The headline news seems concerning, but we’re taking a long-term perspective with Facebook. We doubt the news will meaningfully impact the trajectory of growth of its long-term free cash flow, and we’re not reading too much into events that seem heavily-influenced by the overheated political environment.
By Brian Nelson, CFA
Investors are overreacting and selling shares of Facebook (FB) March 19 because they are worried about implications of a UK probe and a state investigation into the practices of Cambridge Analytica, a privately-held data mining and analysis company, and whether the way Cambridge Analytica acquired and applied data from users of Facebook was legal. The New York Times first broke the story when the paper published a politically-charged article March 17, claiming that Cambridge Analytica:
“…harvested private information from the Facebook profiles of more than 50 million users without their permission…making it one of the largest data leaks in the social network’s history. The breach allowed the company to exploit the private social media activity of a huge swath of the American electorate, developing techniques that underpinned its work on President Trump’s campaign in 2016.”
Since the news broke, Facebook has suspended Cambridge Analytica (on the basis that it may have improperly retained user data), and the social media company publicly stated that “the claim that this is a data breach is completely false.” Though the investigation is ongoing, Facebook believes users knowingly gave their information when they signed up for an app (“thisisyourdigitallife”) from Dr. Aleksandr Kogan, a Cambridge University academic (psychology professor), and “everyone involved gave their consent.” Facebook reiterated in its news release March 17 that “no systems were infiltrated, and no passwords or sensitive pieces of information were stolen or hacked.” Though we can understand how such news can be blown out of proportion for political reasons (Cambridge had ties to the 2016 Trump campaign), we don’t think it is fair to classify the events unfolding at Facebook as a “data breach,” at least at this time.
From where we stand, Facebook was not hacked in the traditional sense, as in other widely-publicized instances of data breaches at Yahoo–now owned by Verizon (VZ)–Target (TGT), and JP Morgan (JPM), for example. In some ways, it is likely the politically-charged environment in the US following the Trump victory in the 2016 election could be making a “mountain out of a molehill,” and quite simply, Facebook could be getting a bad rap. From what we know at this time, people seemingly gave their consent to provide information when they signed up for an app, but we’ll have to see if there may be more to the story. In any case, we would expect scary headlines to continue, tying this to election interference or “meddling,” particularly as opposers of Trump seek to further damage his political stamina. Sellers of Facebook March 19 may be doing so merely in anticipation of more “mudslinging” and headline story risk, as we doubt this development will impact the pace of Facebook’s long-term future free cash flow generation.
With the information we currently have at this point, here’s what we think the outcome may be. We would expect some legislative developments/refinements that may impact how social media companies conduct business in the US and Europe, but this might have been expected in any case, and we don’t think increased regulation will stop users from using social media. Similarly, increased regulation won’t stop companies from buying ads to reach those same people on social media either. From where we stand, we also think Facebook has a strong defense in its view that the events that transpired do not fit the traditional definition of a “data breach.” Though it seems that one of Facebook’s users may have engaged in some very “suspect” behavior with an app, allegedly, we’ll have to see if there is anything more than this. Unlike other events such as the Equifax (EFX) data breach, for example, there wasn’t an intrusion where data and information were outright and explicitly accessed by “hackers.” At this point, we don’t think the possibility of any monetary settlement, if any, will be significantly material to derail Facebook’s underlying fundamentals.
The market may just be overreacting to expectations for headline risk to intensify, as Facebook’s long term remains as bright as ever, in our view.
Related: SOCL, MILN
Related social media: TWTR, SNAP, GOOG, GOOGL
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.