Have Facebook’s Stumbles Created a Buying Opportunity?

In a rare period of gloominess for Facebook’s shareholders, the stock has now slipped 20% from its high set in early February, with shares closing today at $152.22. That’s still a return of 4x from its $38 IPO price in 2012.

The culprit for Facebook’s recent stumble is concerns over data privacy after it became public that Cambridge Analytica, a research firm with ties to numerous political candidates including Donald Trump, was able to access data from 50 million Facebook accounts in 2013. The data was accessed after 270,000 people completed a questionnaire from the firm that also allowed Cambridge to access data on each of those individuals “friends.”

Data privacy has always been a concern of users of the products of large technology companies. But, in this case, Facebook has not done much to help itself along the way. Most gallingly, it had known of the problem for some time but never came clean about the enormity of it until recently when the New York Times and the Observer highlighted the incident. As data privacy has been front and center in the headlines, other simmering concerns have re-emerged, including the accuracy the data Facebook shares with its large advertisers.

An exodus of users from the platform seems unlikely and is not the main concern of the social network. That would be the fact that microtargeting, or using huge amounts of data about the individual habits and tastes of its users is at the heart of its business model. If regulators were to limit what Facebook can collect and how they are able to sell that information, its business model could break.

Looked at from the reverse viewpoint, Facebook must do everything it can to prevent regulators from feeling the need to impose draconian measures. So far, it has come up short. Rather than promising to tweak aspects of the company’s policies, such as how applications are given permission to access data, Facebook should move towards greater transparency in its business including a more extensive review of its advertising policies.

In the meantime, large technology companies like Facebook are always going to have targets on their back as others grow fearful from their accumulation of power. If current year earnings estimates are to be believed, Facebook will earn $7.35 per share this year. It also has $42 billion in cash on its balance sheet against no debt, or close to 10% of its market capitalization. Adjusting for cash, an earnings multiple of 18x on Facebook seems to make little sense, despite any privacy concerns. While Facebook may need to get more serious about its response, investors would do well to accumulate shares at current prices.

 

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