After recent revelations of a massive data breach caused Facebook (NASDAQ:FB) investors to sell off in droves, causing the stock to plunge dramatically—on the back of shares hitting a record high just last month—it will take a lot to convince buyers it's now worth getting back in.
The company’s founder and CEO Mark Zuckerberg knows this all too well. Yesterday, he finally broke more than four days of silence since the revelation that Cambridge Analytica, a London-based data analysis and political consulting firm, improperly accessed the personal information of 50 million Facebook users.
In a post on Facebook, Zuckerberg admitted the company's mistakes and outlined steps to protect user data going forward. “If we can’t then we don’t deserve to serve you,” Zuckerberg said, adding Facebook has a “responsibility” to protect its users’ data.
The company has already taken the most important steps to prevent such a situation from happening again Zuckerberg added. For example, it reduced access to outside apps which led to the user data 'scraping' back in 2014, though some of the measures didn’t take effect until a year later which is why Cambridge Analytica was able to access the data in the intervening months.
Still, despite these assurances, investors are not yet willing to bet on this darling of the tech world, at least not when there's a genuine risk of increased regulation globally as part of the fallout, which could impede the company’s efforts to monetize its most prized commodity—consumer data.
Facebook shares were up just 1% yesterday after Zuckerberg’s statement, rebounding from a 9% nosedive since the news broke over the weekend.
Overreaction or Real Threat?
Is this decline in Facebook share price an overreaction, or is the company now facing some real threats to its business model after a slew of negative developments over the past 12 months?
There's no doubt that this latest crisis has damaged Facebook's reputation. Without question it will take a lot of hard work for the company to restore investor confidence. However, I think Facebook's platform is too big for advertisers to ignore and I believe the mistakes the company made in this case are not fatal. Here's why.
Essentially, Facebook isn’t being accused of selling its customer data to an advertiser. The key message in the articles published by The New York Times and the UK's Guardian and Observer on Saturday, March 17, as well as in statements from Facebook itself is that the social networking giant was duped by researchers, who reportedly gained access to the data of more than 50 million Facebook users, which was then misused for political ads during the 2016 US presidential election.
What might be the worst case outcome from these allegations? Investigations to pinpoint responsibility followed by fines. Would this outcome destroy Facebook's business model? I don’t think so.
According to Bloomberg data, out of the 43 analysts who rate Facebook an equivalent buy, not a single one has downgraded the stock over this latest data breach, which makes it look more like a hiccup than a hurricane.
The risk of regulations may keep the share price depressed in the short-term, but I don’t see a big drop in the numbers of active Facebook users globally over the longer term.
Facebook's monthly active users (MAUs)—people who used Facebook or Facebook Messenger in the prior 30 days—has grown from under 1.4 billion worldwide in 2014's fourth quarter to 2.1 billion in 2017's final three months, led by gains in the Asia/Pacific region where Facebook has more users (499 million) than it does in North America and Europe combined. Because of this massive user base, Facebook still remains the most valuable platform for advertisers. They simply can’t afford to go elsewhere.
The Bottom Line
Trading at $169.39 as of last night's close, with a forward price-to-earning multiple of 19, Facebook stock is looking cheap. I think the company will emerge unscathed from the latest crisis. Any weakness in the share price is a buying opportunity for buy-and-hold investors, though I think this bearish spell hasn't yet run its course. I believe investors waiting on the sidelines will get an even better entry in the second quarter of 2018.