How Many Times Can Facebook Stock Rebound From Another Big Scandal?

Facebook stock takes a hit and yet survives after each scandal alleging abuse by the giant social network. Can it do so again in the face of a company whistleblower’s damaging testimony?


This latest uproar involving Facebook (FB) comes as Silicon Valley’s tenuous relationship with Washington is coming apart at the seams. Lawmakers increasingly threaten to break up Facebook, Apple (AAPL), Amazon (AMZN) and Google-owner Alphabet (GOOGL).

Meanwhile, Wall Street is yawning even though Facebook stock is down about 13.5% from a recent high.

“We acknowledge the negative reports create headline risk for (Facebook) and it’s hard to say when the near-term noise will subside,” JPMorgan analyst Doug Anmuth wrote in a recent note to clients. “But (Facebook) has managed through multiple periods of negativity in the past.”

Anmuth issued a Facebook report on Oct. 7 that maintained a rating of overweight and price target of 450. Facebook stock dipped 1.2%, closing at 324.76 on the stock market today.

In fact, the analyst community as a whole seems unfazed. RBC Capital Markets analyst Brad Erickson initiated coverage on Facebook Sept. 30 with an outperform rating and price target of 425. And he gave no mention to the latest allegations, which allege ambivalence by the company over damaging side effects from its products. The charges first surfaced a couple weeks before Erickson’s note.

“Through multiple product initiatives, we think the company is well positioned to transition from a social-centric platform to a fuller source of online utility, which should steadily benefit shareholders over time,” Erickson wrote in a note to clients.

Facebook Stock: How The Trouble Began

The latest scandal began when the Wall Street Journal published a series of damaging articles called the “Facebook Files” starting in mid-September. The stories are based on thousands of documents provided by former employee Frances Haugen, who was a product manager at the company. That led to an explosive hearing and testimony from Haugen early this month.

She said the social network consistently puts profits over users’ health and safety. In addition, she said, it fosters emotional harm among teenagers. Haugen provided the Senate panel internal documents showing a range of negative impacts from the company’s products.

Facebook consistently denies the core allegations.

Some Facebook stock analysts reacted to the story, but didn’t lose faith in the company. Monness Crespi Hardt analyst Brian White, in a report on Oct. 6, maintained a buy rating and price target of 500.

“We expect Facebook stock to remain hostage to the negative news flow created by this whistleblower that could lead to another round of platform modifications, including dialing down engagement algorithms, and increasing spending on safety,” said White.

However, he said, “We believe Facebook will fundamentally benefit from improved ad spending and capitalize on accelerated digital transformation with new initiatives.”

Trouble Lurking Down The Road For Big Tech?

Yet White does acknowledge there could be trouble for Facebook stock and other Big Techs down the road.

“We found Ms. Haugen highly credible, and we believe she provided Congress with more ammunition in their pursuit of not only reining in Facebook, but Big Tech at large,” he wrote. “Moreover, we would not be surprised if she inspires other tech whistleblowers to come forward.”

Another did come forward. This past week, former employee Sophie Zhang, who worked as a data scientist at Facebook for nearly three years before she was fired last fall, tweeted of her willingness to testify before Congress.

The somewhat sanguine attitude toward these allegations might be attributable to the fact that analysts have seen this movie before. Facebook withstood a firestorm of criticism and investigations for not policing its platform during the 2016 presidential election.

In 2018, Facebook acknowledged that loads of misinformation, much of it emanating from Russia, bombarded its users during that time.

A “troll farm” tied to the Kremlin, called the Internet Research Agency, littered the site with “news” that was either inaccurate or entirely fabricated. The group posted 80,000 times from 2015 to 2017, reaching around 126 million people in the U.S.

Facebook Stock: Executives Hauled Before Congress

Another significant scandal emerged for Facebook stock in March 2018 when it was revealed that personal information on 87 million of its users was surreptitiously obtained by political consultant Cambridge Analytica and put to work for the Donald Trump campaign.

Analysts cut their price targets on Facebook stock due to fears that advertisers would shift away. That month, Facebook stock collapsed 18% to a 10-month low.

Celebrities and other influencers began urging users to quit the social network. The call to action included the Twitter hashtag #DeleteFacebook. Tesla and Space X Chief Executive Elon Musk joined the revolt with the jeer “What’s Facebook?” as he deleted his companies’ Facebook pages.

Facebook CEO Mark Zuckerberg and other senior company executives were hauled before Congress and threatened with antitrust activity and demands that Facebook clean up its platform.

Back then, as now, members of both the House and Senate threatened to break up Facebook. Other plans included changing current internet laws that protect internet companies from lawsuits.

Pressure On Facebook Remains

For now, the pressure on Facebook stock remains. Six antitrust lawsuits filed in June cover a wide range of territory and are written in ways that specifically target Facebook and other Big Tech names. In addition, the Federal Trade Commission is pursuing an antitrust lawsuit that seeks to break up Facebook.

This past week, a coalition of nonprofits debuted, a fresh push to encourage greater government regulation of the social networking giant aimed at forcing the company to change its business model.

Also this past week, a bipartisan group of senators announced plans to introduce a bill that they say would prevent Big Tech platforms from using their power to disadvantage smaller rivals.

Sen. Amy Klobuchar, D-Minn., chair of the Senate Judiciary Committee’s antitrust subpanel, and Sen. Charles E. Grassley, R.-Iowa, the top Republican on the full judiciary committee, announced that they will introduce legislation early next week making it illegal to “self-preference” for Amazon, Apple, Facebook and Google. That’s the practice of giving their own products and services a boost over those of rivals on their platforms.

Moreover, the debate that started last year about whether to update or eliminate Section 230, one of the key laws that fueled the rapid rise of the internet, has continued.

Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.


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