The world’s largest social network, Facebook Inc. (FB, Financial), finds itself at the center of another disaster that has been unique to the digital world. Social media has revolutionized the way people interact with each other, and companies have embraced the change by adapting their marketing strategies to keep up with the digital transformation.
As such, user data has become a crucial element in advertising. So when the news broke that Cambridge Analytica, a firm that worked with President Donald Trump’s election campaign, had exploited data from up to 50 million Facebook user accounts, it was inevitable the headlines were going to affect the company’s stock price.
As of writing, shares of Facebook were down more than 7% from Friday’s closing price and some analysts suggest things could get worse before they get better.
But should this data fiasco really concern investors? Well, probably in the short term, but when you look at Facebook’s business model, the effects of this breach should diminish soon, which means long-term investors should not worry.
According to reports about the incident, the data was improperly shared rather than hacked. U.S. News and World Report reported Cambridge University psychology professor Aleksandr Kogan reportedly obtained the data from Facebook users via an app called "thisisyourdigitallife.” However, the data was shared with Cambridge Analytica without Facebook’s authorization.
Regardless, this has raised concerns about the security of user data. As a result, lawmakers are calling for further scrutiny into the matter and are considering introducing more regulations on social media platforms. Some analysts suggest this could require Facebook and its counterparts to tweak some of the policies that govern the usage of its platform by advertising companies, which in turn might lead to a decline in ad revenue.
But would this affect the stock significantly in the long term?
The company has maintained steady growth in revenue and net income over the last several years, which helped it to nearly double its market value between July 2015 and now. This has significantly contributed to its current low price-earnings ratio of just 33 times compared to historical averages that ranged between 70 and 90 times.
Facebook’s net income has also climbed tremendously from under $5 billion in July 2015 to the current level of nearly $16 billion, which, again, puts the company in a strong position to absorb any shocks that may shake its top line in the foreseeable future.
Therefore, while the current data debacle might shake its stock price temporarily, investors will look at its impressive run of results alongside its price-earnings ratio and not be scared off.
Instead, investors should be concerned about Facebook's declining growth rate in the U.S. According to a recent report by eMarketer, the company faces a long-term challenge of maintaining reasonable growth levels.
According to the report, Facebook and Alphabet Inc.'s (GOOG, Financial) (GOOGL, Financial) Google’s share of digital ad revenue in the U.S. will decline from about 58.5% to about 56.8% in 2018. It also points out that Facebook’s user base is now almost on par with the number of internet users in the U.S., which could prove to be a major obstacle regarding user growth and, subsequently, revenue in the coming years.
Facebook, however, could yet avoid this problem by continuing to grow its Instagram user base as well as tweak its ad business model for optimal monetization.
Some analysts have suggested the data debacle might scare off some advertisers in the fear that Facebook will be legally forced to tighten its data usage policies as well as add more foolproof security measures. However, the biggest question is whether users will be inclined to leave the social media platform or limit the type of information they share following the latest data scare. This could be a real issue that could affect its top-line as well as bottom-line growth.
Nonetheless, if the issue remains a short-term risk as some analysts have suggested, then there is not much to fear.
Conclusion
While the news of the data breach resulted in the company losing $42 billion in market value, Facebook is well positioned to regain these losses in the coming weeks. The company’s current price-earnings ratio makes the stock very attractive to value investors. Given its revenue and earnings history, there is more cause for optimism than there is for panic following the latest headlines.
Disclosure: I have no positions in the stocks mentioned in this article.
