ANALYSIS: How Mark Zuckerberg Ended the FB Stock Crash
Zuckerberg Goes to Washington
The long-awaited showdown between Congress and Facebook Inc (NASDAQ:FB) took place on Tuesday, with CEO Mark Zuckerberg appearing before the U.S. Senate to answer questions about data privacy and Internet regulations.
Although many investors worried that Zuckerberg’s testimony would hurt Facebook stock, it actually forestalled a potential FB stock crash. I can even pinpoint the statement that did it.
But before we dive into Zuckerberg’s testimony and what it means for the future of Facebook stock, let me quickly recap how we got to this scenario.
What Started the FB Stock Crash?
The story begins with the Cambridge Analytica “data breach.”
In 2015 and 2016, a political consultancy firm called Cambridge Analytica used Facebook’s user data to manipulate voters in the United States and around the world. This happened to millions of Facebook users without their consent, but it wasn’t exactly a “data breach.”
A loophole in Facebook’s privacy rules technically allowed Cambridge Analytica to do this.
In any case, news of the data breach started a conversation about “how Facebook is bad for democracy” and how it “should be more tightly regulated.” Once that conversation picked up steam in Washington D.C., investors started to panic.
Facebook stock lost more than 18% of its value. In a two-day stretch in March, the company shed about $50.0 billion in market cap. The market was deathly afraid that Washington would hurt Facebook’s business model.
Chart courtesy of StockCharts.com
As you know, Facebook has an advertising business model. It helps companies target their ads to the right audience and, in exchange, those companies pay Facebook a whole bunch of money. This keeps Facebook’s shareholders happy and FB stock on an upward trek.
If that model were put in jeopardy—either by new regulations, users deleting their Facebook profiles, or anything else—Facebook stock would fall into a death spiral. Luckily, that didn’t happen (yet).
Mark Zuckerberg Testimony: A+
The market clearly loves Zuckerberg’s testimony, because FB stock rose 4.5% as he left Capitol Hill.
It was a masterful performance. Zuckerberg was apologetic about Facebook’s carelessness, admitting that the company should have banned Cambridge Analytica in 2015. He even copped to Facebook’s failure in combatting Russia’s disinformation campaign, saying:
“We didn’t take a broad enough view of our responsibility, and that was a big mistake.”
(Source: “Watch Facebook’s Mark Zuckerberg testify before Congress,” YouTube, April 10, 2018.)
Zuckerberg nodded, smiled, and even laughed on one or two occasions, albeit in that weird, Silicon Valley, I-swear-I’m-not-a-robot kind of way. He was charming (in his own way) and, as a result, he achieved what he set out to do: defuse Washington’s growing anger against Silicon Valley. He ultimately saved FB stock from its downward spiral.
However, don’t be fooled into thinking the Senators went easy on Zuckerberg.
Senator John Kennedy said flat out that Facebook’s “user agreement sucks.” What he means is no one reads a 1,000-page Terms & Conditions agreement before signing up. They expect privacy notices up front in big, bold text—preferably in plain English too.
Meanwhile, Senator Kamala Harris lambasted Facebook for choosing not to inform users about the data breach. Her question period was probably the toughest of the afternoon. I spotted Zuckerberg squirm in his seat a few times.
But overall, investor fears about the testimony were overblown. The single most important moment of the hearing came about three-and-a-half hours in, when Zuckerberg was asked if there have been changes to Facebook’s user count since the Cambridge Analytica debacle. Here’s what he said:
“Senator, there have not.”
Where Does FB Stock Go from Here?
I’m no fortune teller, but logic says that FB stock should recover the value it lost during the last few weeks. That takes care of the short-term outlook of Facebook stock.
The long-term outlook is also good. I’m guessing Facebook will spend some of its cash buying up new companies that diversify away from its social media holdings, if only to compensate for the upswing in regulatory risks that those businesses are facing.
I know what you’re thinking. Aren’t acquisition sprees normally terrible for profit margins? Usually, yes. Most executives are awful at picking winners, but Facebook has had an impressive streak thus far. Remember that it bought Instagram for just $1.1 billion when everyone thought it was worthless.
So, to recap: Mark Zuckerberg nipped the possible FB stock crash in the bud, Facebook’s public relations squad earned its paycheck, and short sellers will have to look elsewhere for their next score.