By now, you have probably heard the Facebook story.
In short, Facebook faces intense criticism over news that Cambridge Analytica, a political research company with ties to President Donald Trump, had allegedly illegitimately obtained and used 50 million Facebook user profiles. US and UK lawmakers fear the data was used to sway voters in the last presidential election and Brexit.
Technical picture looks encouraging
FB stock has now pulled back to its 200 day moving average and potential historical support.
So is FB stock now a buy?
Take a look at this chart of FB since 2013.
This thing has been a juggernaut! It’s uptrend has been stronger than Donald Trump’s sense of self-importance! Every previous deviation to the uptrend has been a gift of a buying opportunity.
Facebook has been a phenomenon. I can’t recall a more capital efficient company scale up and leverage its network effect so quickly and so profitably.
From 2013-2017, Facebook was up 562% versus a gain of 106% for the S&P 500. In the three year period ending 2017, Facebook outperformed by nearly 90% (+126% vs. +38%). The company’s market cap was briefly more than $500,000,000, mostly because over 2 billion people around the globe use Facebook on a daily basis (and I’m one of them!)
So am I lining up to buy?
Not this time.
Let’s dig a little deeper into the story…
Using tactics that one could deem as sneaky, Cambridge Analytica hired 270,000 people via Amazon’s Mechanical Turk to answer questions in an app they installed on Facebook. And then BOOM! Cambridge had access to the friends of the 270,000 people, whereupon they proceeded to scrape the data of 50 million people.
You see, we live in a world where we give up our privacy without a blink. We do so for the convenience of being able to post pictures of our kids, cat videos and vacations and boast how great our online lives are (even if we’re dying inside).
What’s worse is Facebook built a whole business on this…and keeps denying any wrongdoing. The Russians invade Facebook. Facebook says it didn’t happen. Cambridge Analytica gets all this data and Facebook says it’s not a data breach.
Technically they are correct, because Facebook PERMITTED companies to do this. But I would not categorize this as a strong defense. This all has the appearance of a company being so busy making money that it didn’t really care about ethics, or about the privacy of its 2 billion users.
After a delayed reaction the the story breaking, the company is in damage-control mode now. The FTC is investigating whether or not they violated their own privacy settings / terms of service. European lawmakers are up in arms. The long awaited potential entry into China has probably just disappeared. Civil suits and potential fines could be massive – along with the potential for new rules and regulations that cost an arm and a leg to implement and comply with. These could force a change in Facebook’s business model that could render their advertising model less profitable and effective.
Twitter posts like this are gaining notoriety. This was from one of the founders of Whatsapp that sold itself to Facebook a few years ago.
A measured response:
Why I’m not a buyer here
With all of this swirling uncertainty, what is going to cause investors to want to take Facebook’s market cap higher?
The stock is down around 16% from its high and I think the “easy money” money in this stock has been made. I’m thinking we are closer to the beginning of this shitstorm than the end of it. For this reason, I’m throwing Facebook into the the “too hard pile”, technical setups notwithstanding.
The NASDAQ has been the single bright spot in the stock market since February’s correction. While the NADSAQ has posted new highs, the S&P has remained stuck between key mid-range levels. I am watching to see whether Facebook could lead to an undoing of the NASDAQ strength, which could see the whole market enter a precarious new phase. Good trading!