Analysis: Europe Is the Biggest Threat to Facebook Stock
What Happened in Brussels
Remember when Facebook, Inc. (NASDAQ:FB) squared off against Congress? The FB stock price dropped a few percent afterward, as investors considered the dangers of regulation. It turns out they needn’t have worried, though, because American regulators aren’t the problem.
European regulators are the real danger.
That’s what I was thinking on May 22, when Facebook CEO Mark Zuckerberg was forced to appear before the European Parliament. And, boy, did he face some tough questions.
Zuckerberg was grilled on data privacy and antitrust, two issues that Facebook would rather not discuss. But at least those questions were specific and business-related.
Much worse were the questions on Facebook’s role in the world, how it ravages democracy, and whether it can keep its power in check.
“You have to ask yourself how you will be remembered,” said Guy Verhofstadt, one of the regulators from Belgium. “As one of the three big internet giants together with Steve Jobs and Bill Gates who have enriched our world and societies, or on the other hand, the genius that created a digital monster that is destroying our democracies and our societies? That is a question you have to put to yourself.”
(Source: “European legislator says Jobs and Gates ‘enriched’ society, asks if Zuckerberg ‘created a digital monster’,” The Verge, May 22, 2018.)
Hostility was thick in the air.
Luckily for the FB stock price, the session only lasted one hour, and most of that time was spent on asking questions. Zuckerberg managed to leave the meeting without ever answering tough questions.
But Facebook—and Mark Zuckerberg—need to be careful going forward.
Europe’s Vendetta Against Tech Stocks
There’s no sugarcoating the truth—European bureaucrats are less business-friendly than their American counterparts. Everyone knows that. But somehow we ignore it when evaluating our favorite stocks.
We ignore a lot of things.
We ignore that the European Union governs a population roughly equal to the continental United States. We ignore that the European Parliament, which runs the European Union, is hell-bent on reining in the power of U.S. technology giants. But we ignore these things at our own peril.
Take a look at recent history:
- Apple Inc. (NASDAQ:AAPL) was charged €13.0 billion for negotiating an exclusively low tax rate in Ireland, something that EU officials said was unfair to local business. (Source: “State aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion,” European Commission, August 30, 2016.)
- Google was fined €2.42 billion for favoring its own businesses in search results. (Source: “Antitrust: Commission fines Google €2.42 billion for abusing dominance as search engine by giving illegal advantage to own comparison shopping service,” European Commission, June 27, 2017.)
- QUALCOMM, Inc. (NASDAQ:QCOM) paid €997.0 billion for convincing Apple not to buy chips from Intel Corporation (NASDAQ:INTC). Convincing with, you know, money. Apparently, that’s an antitrust violation. (Source: “Antitrust: Commission fines Qualcomm €997 million for abuse of dominant market position,” European Commission, January 24, 2018.)
Worse than any of the individual fines, however, is the General Data Protection Regulation (GDPR), which is scheduled to go into effect on May 25, 2018. It is a sweeping privacy law that will put the screws to technology companies, and to Silicon Valley juggernauts in particular.
Facebook could see a 10% decline in “time spent” once the GDPR goes into effect. That shift could cost the company $2.8 billion in annual revenue, which, no matter how big Facebook has become, is a lot of money.
Analyst Take
It’s strange that Facebook stock is still riding high. Given how aggressive regulators were, and the fact that the GDPR goes into effect soon, I expected the market to turn bearish.
My conclusion is that U.S. investors aren’t fully dialed into European news. Most of us on this side of the Atlantic neither know nor care for what’s happening outside our borders, but that doesn’t magic the rest of the world into nonexistence.
There are other parts of the world, and Facebook needs them to keep its profits (and share price) going up. So, if you’re looking at Facebook stock, maybe wait until the market absorbs this tidbit of international news.
