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Twitter and Facebook Appear on Capitol Hill and Their Shares Slide

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On Wednesday morning Facebook (FB - Free Report) COO Sheryl Sandberg and Twitter (TWTR - Free Report) CEO Jack Dorsey testified before the Senate Intelligence Committee to answer concerns about the use of their respective platforms to interfere in election and spread intentionally misleading or incendiary information as well as the companies’ efforts to protect the personal data of their users.

Alphabet CEO Larry Page had also been invited to the hearing but declined to invitation. Senator Marco Rubio, among others, was critical of Google’s failure to make Mr. Page available. The senator suggested that a possible reason Page was absent is because, “He is arrogant.”

The questioning, broadcast live on multiple news outlets, has been polite and orderly, yet also very direct as the executives face inquiries into efforts by Russia and Iran to meddle in the U.S. elections process. The equity markets appear dissatisfied with the testimony and at mid-day, shares of Facebook were trading 1.5% lower, Twitter was down more than 6% and alphabet had declined more than 2%.

The broad markets followed with the tech-heavy NASDAQ composite shedding over 1%.

Both Dorsey and Sandberg described ongoing efforts to stay in front of participants on their platforms who are using sophisticated “bot armies” to spread information that advances certain political and social views and often makes use of patently untrue facts. Sandberg stated, “We are more determined than our opponents and we will keep fighting.” She also described an atmosphere of cooperation between Facebook, Twitter and other social media companies in the ongoing battle against these “bad actors.”

Dorsey went as far as to say that Twitter and similar platforms “play an important role in our democracy” by allowing the free exchange of ideas and opinions but also stipulated that such a forum can include everything from “inspired ideas” to “lies and deception.”

So do any of these developments actually represent negative developments for earnings and share prices at the social media giants? Possibly. It comes down to two basic inputs – the number of active users and the costs of running the services.

Obviously, advertisers are willing to pay more for advertising on services with higher numbers of users.

When Facebook CEO Mark Zuckerberg testified before the Senate in April – when these issues began to creep up – he was able to reassure investors that the number of daily and monthly active users had continued to grow, along with the advertising revenue those users generate for the company. Shares in Facebook increased more than 30% between April and July of 2018, topping out at $217/share before disappointing guidance - due partly to the increased labor and technology costs of dealing with fake accounts and misinformation – knocked the stock price back down to the $170/share level.

In the end, that’s likely to be the biggest issue facing Facebook, Twitter and other internet companies – how much is it going to cost to mitigate the damage of the fake information issues. We’ll probably have to wait until the next earnings cycle for a clear look at that effect. Facebook is scheduled to report quarterly results on November 7th, Twitter on October 25th. It’s an important quarter for both companies as investors find out how actual results are affected by these thorny issues.

Twitter is currently a Zacks Rank #3 (HOLD) and Facebook, due to recent negative revisions, is a Zacks Rank #5 (Strong Sell).

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