Is Facebook in trouble?

Facebook made the news this month with a story that more than 50 million users’ data had found its way off of the Facebook platform and into the hands of Cambridge Analytica (a political consulting firm).25 This was not a ‘hack’ of the Facebook platform. This apparently happened when a firm, named GSR, which had a proper contract with Facebook to have access to the data, allegedly sold the information to Cambridge Analytica.26 GSR had access to the information in order to build an ‘app’ (a software program specifically designed to collect user information and identify user relationships, friends, likes, dislikes, viewing habits, etc.). That is, more or less, how Facebook makes money. Facebook has such detailed information about its users, that advertisers (selling just about anything) can specifically target Facebook users based on their interests and social network. Facebook users agree to this because they get to use the Facebook platform for free. Always remember – if any service is free – YOU are the product

Many users like this arrangement. They receive advertisements that are specifically tailored to them. Imagine being able to watch television but only be exposed to commercials for products or services you are actually interested in? Facebook’s Terms of Service contract clearly indicates that users’ personal information is provided to firms for targeted advertisements (whether any users read the Terms of Service, or not, is a different issue).

The newsworthy issue seems to be that Cambridge Analytica, which was hired by the Trump campaign, apparently attempted to use this information to target users in an effort to sway their opinions, and perhaps ultimately their votes, in the recent U.S. presidential election.27 The market’s reaction to this situation was significantly negative. Facebook’s stock price fell from a recent high of $185.23 on March 9, 2018 to a low $152.22 on March 27, 2018, a decline of almost 17.8%.28

Several clients called to discuss this situation with me. From an investment and finance perspective, in a rare example of complete agreement among myself and clients, none of us understood why this was solely a Facebook issue. Essentially all social media companies make money from leveraging their clients’ personal information. Likewise, social media users all agreed to this arrangement. All clients viewed this situation as purely a political issue.

Ironically, advertisements on radio and television, attempting to sway voters’ opinions, happen during all U.S. elections. Television watchers are bombarded with political advertising during an election season. In 2016, campaigns spent $4.4 billion on television advertisements alone.29 Wouldn’t this money be better spent on targeting specific voters on Facebook? Is there a difference from targeting users on a social network and advertising to viewers of a particular television show?

Using Facebook for political purposes has been going on for a long time. The Obama campaign used Facebook extensively in the 2012 election.30 However, the Obama campaign used the data directly available on Facebook, and didn’t gain access to users’ information via some third party research firm.31 In fact, the Obama campaign was lauded for its use of Facebook in both the 2008 and 2012 campaigns:

“Barack Obama’s re-election team are building a vast digital data operation that for the first time combines a unified database on millions of Americans with the power of Facebook to target individual voters to a degree never achieved before.”32

From my perspective this current uproar over Facebook users’ data being used for political purposes seems somewhat of a delayed reaction. Why wasn’t there an upheaval in previous elections? Are clients really upset that their data is being used? Or are some people just upset that the Trump campaign used their data?

If that’s the case, why weren’t all U.S. internet users outraged when the laws were changed in 2017 allowing Internet Service Providers (ISPs) to sell internet users’ browsing history data?33 The ISPs claimed that companies such as Google and Facebook had an unfair competitive advantage because they could monetize customer information but the ISPs could not. Congressed agreed and changed the law a year ago.34 Where was the outrage? Now, not only are users personal preferences or social networks available for advertisers, but so is everything internet users ever search for online. Doesn’t that seem even more intrusive than advertisers using Facebook data?

Interestingly, the personal information available on Facebook is generally not data many people truly care about. People seem much more concerned about their social security number, bank account information, or credit card information. The Facebook data in question simply reflects users’ friends and their individual, and collective, interests. Is the latter really a concern?

From an investment standpoint, if lawmakers or regulators decide that Facebook, or Google, or other social networking sites, must limit the amount of user information disclosed to marketers, then these companies’ business models will be forever changed. In my opinion, their extensive knowledge of people’s personal networks is the reason to own these stocks. Now, their business models may face uncertain regulation. This likely explains why these stocks are down. Deciding whether to invest in them at these prices requires investors to handicap the outcome of potential regulation.  As for me, I try never to front run the U.S. Congress. Remember, it is my view that to be a successful long-term investor you need to: have vision… have courage… have wisdom.



23 Ibid



26 Ibid

27 Ibid




31 Ibid



34 Ibid