Shares in Facebook (FB - Free Report) plummeted on Monday after the FTC confirmed that it had opened an investigation into the company’s privacy policies and protection of user data in the wake of the Cambridge Analytica scandal, with the stock trading down more than 7% at the lows before a partial rebound. This comes on top of a nearly 14% decline in the previous week. In other damaging news for the company, it was also revealed that Facebook had improperly accessed some phone and text message data from users who used the Facebook mobile app on Android phones.
This news seems very frightening, both for users who feel that their privacy has been compromised by Facebook’s collection of their data and for investors in the stock - who appear to fear Facebook will lose users, advertisers or both. In fact, it was users who requested an accounting of what data Facebook had already collected from them (presumably because of the Cambridge Analytica news) who discovered that in some cases their mobile phone data was included. It has been a painful cascade of negative press items for the stock recently.
Both Fears are Overblown
Let’s start with the user data. Cambridge Analytica collected reams of user data from Facebook with the object of distilling it for sale to third parties. They even used a dubious “personality quiz” to harvest the data from users and their friends. Finally, they appear to have used the data in an attempt to influence voters in the 2016 elections for Cambridge’s political clients, most notably the Trump campaign. All of this certainly has a distinctly “icky” feel, and a small number of users do appear to be abandoning or deleting their Facebook accounts. In reality, the data collected is not as damaging to users as it might seem. Everyone who uses Facebook will already be familiar with targeted ads. (Have you ever searched for “patio furniture” on Google, then logged into Facebook and seen a banner ad for patio furniture?) It’s not a bank account or social security number, it’s just a little information about what you’re interested in and maybe even who your friends are, collected with the intention of selling something, whether the product is a chaise lounge or a political candidate. It’s not going to cause anyone financial or emotional harm.
As for the battered Facebook stock price, it seems the selloff has been the product of the frightening headlines creating a short-term trading opportunity for traders rather than based on real expectations for a decline in the long-term financial prospects of the company. Facebook’s business has enormous inertia – it’s really the only show in town for most of its users and advertisers. A mass exodus of either group is extremely unlikely. With the stock down a full 20% from all-time highs less than 2 months ago, this is now a legitimate value opportunity. With a forward P/E of 22, Facebook has never been cheaper on a valuation basis, and earnings estimates into the future have been steadily revised upward in recent months, resulting in a Zack’s rank of 1, our strongest buy. This may well be an opportunity to get a market-leading titan at a bargain-basement price, especially on a day when the NASDAQ composite index is up nearly 2%, even with the drag of Facebook’s poor performance.