Is it time to buy Facebook?

Michael Baxter shares his insights around buying shares in Facebook after the recent headlines

Article updated: 23 March 2018 5:00pm Author: Michael Baxter

Photo of someone tapping their phone

If you had bought shares in BP soon after the Gulf of Mexico oil spill you would have made a massive profit. Can you now say the same thing about Facebook, and indeed the big techs in general?

In the year 2000, BP was responsible for a breach - an oil breach. Shares collapsed, and at one point BP shares were down by 52 per cent, at 300p, back to the price in 1996. Today, BP shares are at 463p. In fact, even that price may understate the reality - a few days ago, BP shares were at 534p, but have fallen in sync with wider share falls, caused by the latest Trump economic sabre rattling.

Is it like that with Facebook right now?

The falls

Shares in Facebook are down 11 per cent in the last few days, yet oddly, Apple, which has an exemplary attitude towards data privacy, has seen an eight per cent fall. Alphabet is down by a tiny margin, Amazon and Netflix - which itself has come under criticism for its use of data in the past - were unaffected.

There seems to be no good reason for the fall in the Apple share price, just the usual title tattle on the popularity of its phones. Indeed, given its very strong approach to data privacy, I would expect its shares to rise.
As for Facebook - the decline so far is not so great - it almost falls within the parameters that you would put down to noise - shares go up and down, and in volatile stocks, rises and falls of ten per cent are not so unusual.
Sure, we know that the shares are down because of the recent data controversy, but the falls are not as dramatic as I would have expected, not given the negative publicity, people talking about deleting their Facebook app from their phones, advertisers, the likes of Unilever, threatening to pull their ads.

Breach

Facebook argues that there was in fact no data breach - it was not really its fault that Cambridge Analytica used data to supposedly manipulate the US election; it was in fact the fault of a third party not following Facebook terms and conditions. Well, this may be the case under US Law, but not under EU Law. Under General Data Protection Regulation, GDPR, already in place, but not enforceable until May of this year, you are both responsible and accountable for all data you collect, regardless of whether it was you or a third party that misused it. By that definition, Facebook suffered a data breach.
Mark Zuckerberg calls it a breach of trust - which actually may be more serious.

Data age

It was last year when The Economist magazine led with the story ‘data is the new oil’.

In 2013, a paper was issued saying “A full 90 percent of all the data in the world has been generated over the last two years. But the pace is increasing. Last year it was claimed that more data would be created in the year 2017 than in the previous 5,000 years. There is no sign of this acceleration in data creation slowing down.

Much of this data is called big data - it is anonymous - although there is a question mark over how anonymous - is it possible to compare multiple anonymous data streams with some very basic and non-dangerous data, and from that information de-anonymise the lot? For example, one data source may know that a certain man likes a certain type of clothing available in a certain store, another data source may tell you that this man lives on a certain street, another data source might say this man drives a certain car, while another data source may say Mr Smith lives in this street and is the only person to drive that car.

But there are rules against that.

Advertising

But one of the more interesting aspects of data is the way it can be used to make advertising much more effective.
Back in the day, a TV station, or magazine publisher, would have broad information about their viewers/readers. If you were selling, say a holiday at a luxury beach resort, and you knew that the people of a certain socio-economic group and age were more likely to book that holiday, then you advertised in media targeted at those demographics. But for all that, you knew that the majority of the people who saw the ad would not be interested.

With Google, advertising took a leap forward. You knew that someone who typed ‘holidays at luxury beach resorts’ was far more likely to book your holiday than a random reader of say The Sunday Times. That is what made Google AdWords so compelling. The cost of an ad on Google AdWords is determined by auction - meaning that these days the price is so high that the advertising medium is no longer so cost effective - but Google, or the parent company Alphabet, rakes in billions of dollars.

But now things are more sophisticated. Google may have access to search history - Facebook, it seems, has even more data. Advertising can be targeted with an extraordinary level of accuracy.

The starting level for an advertising campaign is much lower too. You can advertise on Facebook, maybe to test a new idea or product, for as little as a fiver.

Trust

This is why Facebook and Alphabet are so valuable. Traditional media hate this. Newspaper publishers look on with envious eyes, longing for a return of pre-digital advertising, an era summed up nicely by the words of perhaps the first advertising guru, John Wanamaker: “Half the money I spend on advertising is wasted; the trouble is, I don't know which half.”

Rubbing their hands

You can practically touch the glee - the newspapers are loving this, the weapons have been sharpened, now they take it in turns to hurl them, and thrust them into the Facebook back and front. If they could they would plunge them into the Facebook heart.

I find the idea that Facebook was responsible for Trump and Brexit laughable. If you want to blame a medium for Brexit, look at the ‘Up Yours Delors’ Sun or the ultra-tolerant, supporter of multiculturalism, The Daily Mail. If you want to blame someone for Trump, blame greedy bankers, and growing US inequality which means real median wages are no higher today in the US than 30 or even 40 years ago.

Can Facebook survive?

Social media, despite the hopes of a luddite press, is not going away. A more pertinent question relates to whether Facebook will go away. I worry more about the trend for younger people to opt for other social media - the perception that Facebook is more for mum and dad. Don’t forget, however, the company also has WhatsApp, Instagram and, should social media be eventually conducted in virtual space, Oculus Rift.

The age of data is not set to come to an end. The reason for the spat of new regulations we are seeing - Open Banking, GDPR and e-Privacy, is that there is a recognition that data has become essential and that regulations can persuade the public to allow their data to be used.

As for Facebook, if it can weather this storm, I would say the potential value in the data it collects dwarfs the amount the company has managed to extract so far.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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