Since the investigation began, concerns around the future of the social network have rose and shares fell to almost 2.5% on Wednesday, despite Facebook chief executive Mark Zuckerberg admitting “we also made mistakes”.
On Monday, the stock fell almost 7% and as much as 5% on Tuesday.
In 2016, Cambridge Analytica (CA) was hired by the Trump campaign and is now under investigation after being accused of buying data from Facebook and using it to send pro-Trump material to swing voters.
Zuckerberg said in a statement: “We have a responsibility to protect your data, and if we can’t then we don’t deserve to serve you.
“This was a breach of trust between Kogan, Cambridge Analytica and Facebook. But it was also a breach of trust between Facebook and the people who share their data with us and expect us to protect it. We need to fix that.”
Pulling the brake
However, investors in Facebook have remained cautious with Nordea’s responsible investment team putting a hold on investments in Facebook for its sustainable investing funds.
Nordea said the fund managers of its Stars funds range are not permitted to buy shares in Facebook and are “pulling the brake” because of the risks related to governance around data protection which “may have been severely compromised”.
Katarina Hammar, head of Nordea’s responsible investment unit, says: “In conjunction with this, the increased regulatory risk dictates that right now, it is incompatible with the level of clarity we want to have with our investments in the Stars funds.
“Until we’ve had time to fully assess the breath and width of this problem, we choose to quarantine the company.”
While fund managers aren’t allowed to buy shares during the quarantine, Nordea confirmed they can sell the shares already held.
Likewise, Tom Walker, manager of the Martin Currie Global Portfolio Trust (GPT), says he has also pulled money out of Facebook because of concerns but continues to hold the stock and “will monitor very closely”.
He says: “There is a real risk that the consumer is going to say, ‘Well I don’t trust Facebook anymore’ and the growth that we’ve continued to see in [Facebook’s] daily and monthly attribute might go into reverse.
“The stock’s not been a fantastic performer over the last year either and it’s probably performed pretty much in line with the market.”
Days are numbered
With Facebook under scrutiny and an investigation underway, do investors need to be weary of tech stocks? Could they be about to take a hit from regulation and a reputational backlash?
In January this year, George Soros called out Facebook and fellow tech giant Google at the World Economic Forum and said their “days are numbered”.
Comparing them to a gambling business, he said they claim they are “merely distributing information” but are in fact “near-monopoly distributors”, calling for more “stringent regulations”.
During the event he said, “it is only a matter of time before the global dominance of the US IT monopolies is broken”.
Fast forward three months and in light of the Facebook investigation, Darius McDermott, managing director at Chelsea Financial Services labels Soros’s comments as “even more wise”.
While it is the social media giant under the spotlight, Chris Beauchamp, chief market analyst at IG Group, says: “The storm that has descended over Facebook has not left other tech giants immune.”
He adds: “It is still very early days, and from the looks of things so far greater regulatory scrutiny is probably on its way, along with law suits that will increase costs for these titans.”
However, Beauchamp argues that it is also “too soon” to declare these tech titan’s demise because Facebook still has active users “running in to the billions” and it is unlikely consumers will stop using Google entirely without an alternative.
“There was a conversation to be had about data and privacy, but the investment case for the tech names remains sound, given the potential for growth into undeveloped markets and the substantial revenues they derive from advertising.”
Positive outlook
Meanwhile, Shoaib Zafar, senior analyst at SYZ Asset Management, remains positive on Facebook’s “deep pockets”, stating that the company is in good shape to carry out meaningful investments in areas where it needs to improve without hurting its operating or net incomes.
“In addition, any enhancements in the business model, particularly in the area of data security, will be quickly acknowledged by both its users and regulators,” he adds.
“We stay invested in Facebook and continue to see its valuations as attractive with the stock trading at 19x 2018 estimated EPS and 16x 2019 estimated EPS.”
