Why Facebook is suddenly reeling

In this article:

Facebook (FB) has been embroiled in political controversy for more than a year, amid mounting evidence of abuse on the social-media platform relating to the 2016 US elections. Yet earnings have continued to soar, along with the stock price.

Until now. Facebook’s shares have dropped by more than 11%, erasing some $60 billion in market value, following exposes published by the New York Times and the Observer of London showing how a political research firm working for Donald Trump’s campaign in 2016 exploited sensitive data belonging to as many as 50 million American Facebook users. The firm, Cambridge Analytica, used that data to identify voters susceptible to persuasion and make sure they saw ads or other content that praised Trump or bashed his opponents, including Hillary Clinton.

The essence of the Cambridge Analytica revelations is not new. It’s been apparent for months that political operatives of many persuasions flooded Facebook with content, both legitimate and bogus, to try influencing the outcome of the 2016 presidential election. In February, special prosecutor Robert Mueller filed an indictment (unrelated to Cambridge Analytica) detailing how Russian agents used Facebook and other social-media networks to try to swing the election in Trump’s favor. Facebook shares barely flinched, and were soon above pre-indictment levels. Until the March 19 selloff, Facebook shares had risen 49% since the day Trump won in 2016.

Facebook stock as of about 1:25 EDT on Tuesday.
Facebook stock as of about 1:25 EDT on Tuesday.

But investors obviously have major new worries about Facebook, as key legislators in the United States and Europe call for new hearings on the matter, possibly leading to new regulations. The U.S. Federal Trade Commission is also investigating whether Facebook violated a 2011 consent decree governing the privacy of user data, with billions of dollars in fines possible. “It could compromise Facebook’s business model,” says V.S. Subrahmanian, who teaches technology and cybersecurity at Dartmouth University. “They should have had a handle on this quite some time ago.”

Stiffer regulations

On Capitol Hill, a bill called the Honest Ads Act would require online political ads—like those Facebook earns millions from—to abide by the same rules as ads run via print and broadcast media, such as disclosing who paid for the ad. It would also require large digital platforms such as Facebook to track and report political spending by campaigns in ways they don’t have to do now. Many Democrats support the bill, but few Republicans do, and it hasn’t gotten much traction. That could change if fresh outrage turns voters against Facebook. If the bill were to pass, it might not harm Facebook’s financial performance much, if at all. But legislation can also take unexpected turns and end up more punitive than expected.

A bigger concern for Facebook may be nascent efforts to beef up regulation of the platform at the state level. Attorneys general in Massachusetts and Pennsylvania say they’re now investigating, raising the specter of patchwork state-by-state rules that sometimes make federal regulation seem benign. Facebook may also have violated a 2011 consent decree that governs how the firm protects user data, with potential fines in the billions of dollars. Oh, and class-action lawyers are now sniffing into the matter.

Across the Atlantic, the European Union says it will investigate as well. European privacy rules are often stricter than those in the United States, which could portend new constraints on Facebook’s operations there.

Notably absent amid this uproar: Facebook CEO Mark Zuckerberg, who has had very little to say, in general, about the entire controversy since questions first emerged late in 2016 about Facebook’s role in the US elections. Zuckerberg never testified before the Senate Intelligence Committee when it held hearings on the matter in 2017, instead sending company attorneys. Facebook’s first official response to the Cambridge Analytica stories came from a deputy general counsel arguing that the use of data in question didn’t amount to a “data breach.” He’s right, but the company still seems oblivious to the broader question: Is Facebook evil?

A range of American and European politicians are now calling for Zuckerberg to testify and explain the whole mess, including Democratic senators Amy Klobuchar of Minnesota and Mark Warner of Virginia, along with Republican senators such as Jeff Flake of Arizona.

Facebook, with its massive user base of 2 billion people, remains a powerhouse, with the cash and muscle to weather many storms. But that doesn’t mean the stock will remain a darling of investors. Not long ago, the so-called FANG stocks—Facebook, Amazon (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOGL)—seemed to power the entire tech sector ever higher. But ANG are now leaving F in the dust. So far this year, Netflix is up 54%, Amazon 29% and Alphabet 4%–all ahead of the S&P 500. Facebook, by contrast, is down 5% for the year, and trailing the S&P. Facebook is rarely behind. Maybe that will bring Zuckerberg out of hiding.

Confidential tip line: [email protected]. Encrypted communication available.

Read more:

Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman

Follow Yahoo Finance on Facebook, Twitter, Instagram, and LinkedIn

Advertisement