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How Facebook (FB) Stock Fared During the Cambridge Analytica Scandal

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Almost everyone, investors and otherwise, has heard in some way, shape, or form of the Facebook-Cambridge Analytica scandal. Captivating national audiences, the scandal caused strong fluctuations in Facebook (FB - Free Report) stock. With the storm behind us, now is the time to look into how the Facebook-Cambridge Analytica scandal affected Facebook, and what it spells out for the future.

Background

The premise of the scandal surrounds a 2014 personality-quiz app made by Cambridge University lab researcher Aleksander Kogan. After individuals downloaded the app, it asked for users’ Facebook information, then accessing information on user’s friends, and saving it in a private database. After collecting 50 million Facebook users’ information, Cambridge Analytica made 30 million “psychographic” profiles about voters.

Cambridge Analytica has strong connections to individuals close to President Trump, and things were made worse when security footage of Alexander Nix, CEO of the company, offering to bribe global public officials emerged.

To further deepen the hole, Cambridge Analytica implemented these profiles about voters to create targeted ads for both Ted Cruz’s and Donald Trump’s 2016 campaign.

Timeline

The issue was thought to be resolved in 2014 with rule changes made by Facebook to restrict the power a developer had in terms of user data acquisition. This rule was never actively implemented, and Kogan kept the data he had collected from his app.

In December of 2015, The Guardian released a highly publicized article that took the media by storm. Share prices plummeted 9.5% in one month up until mid-January.

Then, going into the presidential election, Trump’s team invested heavily in Facebook ads linked to Cambridge Analytica. In March of this year, both The Guardian and New York Times published articles exposing that nearly 50 million Facebook profiles were used to influence individuals voting for the presidential election and Brexit decision.

Following the reports, the FTC launched an investigation into Facebook as to whether or not the company broke privacy protection policy, all while pushing Zuckerberg to testify in front of Congress. After continued pressure, Zuckerberg released an apologetic statement at the end of March and testified in mid-April. In one month during the span of these events, Facebook share prices dropped 11%.

Amidst hearings, Facebook released their Q1 2018 earnings report, in which the firm outperformed expectations. This, along with the recent announcement that all political ads on Facebook and Instagram have to be saved to a public archive in hopes of reducing questionable activity, has contributed to the company’s comeback. From mid-April to date, share prices have gone up 16%, lifting year-to-date gains to 5.4%.

Future

With Facebook restoring their public image and security, the company has made an almost-full recovery. It is now back on track with normal business activities and looking to continue with its current success this year.

“Despite facing important challenges, our community and business are off to a strong start in 2018…We are taking a broader view of our responsibility and investing to make sure our services are used for good. But we also need to keep building new tools to help people connect, strengthen our communities, and bring the world closer together” said CEO Mark Zuckerberg in a recent earnings release.

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