For years, Facebook Inc. (FB, Financial) has weathered tremendous regulatory and political pressure. The social media giant has been accused of all manner of sins, such as providing a platform for hate speech and fake news, as well as effectively facilitating (through negligence or indifference) foreign manipulation of U.S. elections. Whether real, imagined or overblown, such allegations can result in painful consequences.
Facebook investors appear to be underestimating the full scale of political risk facing the company. They do so at their peril.
Dodging one bullet
Facebook’s stock took a hit in early June when it was revealed that the Federal Trade Commission was investigating the company. However, Facebook bulls were soon given the heartening news that the company had agreed to settle with the Federal Trade Commission, which includes a $5 billion fine.
A $5 billion fine may hardly sound like cause for relief, but shareholders know that Facebook can more than afford the expense and were clearly happy with the comparative lightness of the penalty. Indeed, the settlement appears to have done nothing to restrict or otherwise regulate Facebook’s ability to collect user data, a major point of concern for investors. Hence, many felt the fine amounted to dodging a bullet.
However, investors’ relief at the relative lightness of the FTC settlement looks premature. In the grand scheme of things, this particular victory did little to actually settle Facebook’s precarious situation.
Many more in the chamber
There are many more pending investigations and legal actions that could make trouble for Facebook in future:
- Threats of federal antitrust action have mounted, including from Republican President Donald Trump.
- Democratic presidential candidates have called for the breakup of Facebook, as well as other major tech companies.
- Members of Congress have proposed a new privacy law that could devastate Facebook’s ability to collect lucrative data.
- At the state level, a number of attorneys general have opened investigations of their own into data privacy and competition.
- European regulators are deploying sanctions for violations of the region’s privacy laws, even as many EU member states have been increasing pressure on Facebook as well.
Particularly vulnerable
The sheer quantity of political and regulatory headwinds buffeting Facebook is cause for concern. The threat that they might actually capsize the company cannot be laughed off. And its woes stretch well beyond its native shores. In the EU, strict privacy laws have created their own massive headaches for the increasingly embattled social media company.
As we have discussed previously, the threat of antitrust action directed at big tech companies such as Facebook represents a potentially catastrophic black swan event for the industry. Companies such as Apple Inc. (AAPL), Amazon.com Inc. (NASDAQ:AMZN) and Alphabet Inc. (GOOGL) are all vulnerable to this threat, yet Facebook is arguably most susceptible thanks to its role as a social media platform.
Perceptions of bias and hidden agendas have combined with fears over data privacy and disruption of civic discourse to create a potentially toxic mix of bipartisan antipathy. Heavy regulation could damage Facebook’s business model irreparably, irrespective of the federal government’s appetite for robust antitrust action.
Verdict
Investors must be cognizant of these federal, state and international regulatory and legal actions facing Facebook. Their resolution could well determine the fate of Facebook, for good or ill.
Disclosure: No positions.
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