On 7 February I published a Sustainability Soapbox article titled ‘Facing Hard Questions’, which discussed Facebook’s social responsibility credentials.
Since then we’ve seen revelations around how private data on millions of users was passed to third-parties. Facebook’s share price has fallen around 19% at the time of writing, with the most recent fall prompted by reports that the US Federal Trade Commission is to investigate the company.
The sustainability of Facebook from a social-impact perspective is inextricably linked to its sustainability as a business. So the recent news flow is important to assess.
Overall, I view the negative headlines and the subsequent market sell-off as an over-reaction. There is certainly an increased risk of further regulation of Facebook’s user-data, as well as faltering trust in the company, both of which threaten Facebook’s ability to leverage data to deploy adverts. However, I currently believe there is a relatively low likelihood of anything coming to fruition that would materially undermine Facebook’s ability to operate and grow its services (which include Facebook itself, but also applications such as Instagram and WhatsApp).
Facebook has been increasing its investment in user security for some time. So most of the headlines relate to old business practices which have been banished from the platform (in some cases several years ago).
Unscientific surveys of users claiming to have deleted the App; anecdotal examples of advertisers suspending activity on Facebook; or investors quarantining their shares do not in my view constitute a failing platform.
Furthermore, from a valuation perspective Facebook looks a compelling proposition. Valuation multiples (price-to-earnings and price-to-free-cash-flow) relative to growth, relative to history and particularly relative to peers are depressed. I can think of few other large-cap stocks that offer an equivalent combination of potential growth, attractive valuation, and quality (high returns on capital and strength of balance sheet). I strongly suspect that we will one day look back on this period as a buying opportunity.
However, we are dealing with unquantifiable controversy here. As bottom-up stock-pickers we specialise in ‘analysable risk’ and dislike ‘unanalysable risk’, which the investment case is becoming increasingly dependent on. The market is focusing on the downside risks which – although unquantifiable – are potentially greater than in the past and directly question the sustainability of Facebook’s business model. As such, we are taking a conservative approach and will not be adding to our holding until these issues are clarified.
A reminder of Facebook’s sustainability credentials
I accept that the repeated negative news flow is difficult to defend from a sustainability perspective. While I personally have a positive view of social media platforms and Facebook’s leadership, there are others within the responsible investment community who have strong negative views on Facebook, Mark Zuckerberg and social media generally.
Much of this comes down to subjective opinion, although we have assessed the historic and current actions of Facebook and Zuckerberg and lean in their favour. The recent news has not fundamentally altered this and I think the points expressed in my previous article remain true today. Remember, this is a company that was already on a very visible path to improving its products and practices.
I also believe that some context is required on the social impact of Facebook. In the current environment of negativity it is easy to forget the positive impacts of what the company actually does:
- Helps families and friends in distant (and not so distant) places share experiences with each other.
- It enables two billion people to share funny, touching, positive, negative, inane, stupid, genius and pointless things with each other.
- Remember £2 text messages? WhatsApp allows virtually free (£1 per year) and highly efficient communication via group chats, internationally.
- Facebook’s market place increases price transparency for buying new and second-hand goods (consumer benefit and waste reduction).
- The sharing of news (a small percentage of which is fake) and building communities of people with common (usually positive) motivations.
- Help more than 70 million small and medium-sized businesses do targeted, affordable advertising.
Ultimately, Facebook’s business model aims to securely leverage the huge amounts of data they hold to identify who likes what and then target advertising at them. The ‘deal’ is that users get all of the above services for the price of their data. This is something I believe most users appreciate – or if they didn’t before, they certainly do now.
Facebook will see increased regulation and Mark Zuckerberg appears to welcome it. Ironically, this may ultimately increase the power of the big platforms such as Facebook and YouTube, which have the resources to invest and respond.
As far as we know, Facebook did not misuse its data. There was a breach of trust with an academic party which passed the data to a third-party, which allegedly misused the data. This has now been shut down and the relationship between Facebook and academia will likely suffer as a result (some of which does a lot of good, such as through population health surveys).
The question of voter manipulation (particularly Russian interference) should certainly not be dismissed. However, this type of influencing has been done for decades through political advertising in traditional media, such as newspapers, billboards and television. The Facebook data in question was fairly basic and was blended with other data (including third-party psychometric tests) to profile and target particular demographics for television and social-media advertising. Although the data was allegedly illegally acquired, the end use was not particularly ground-breaking. Indeed, Barack Obama’s team used social-media targeting very effectively in his Presidential election campaigns, as did Hillary Clinton (although just not well enough).
Facebook has access to data on over two billion users. It has a huge responsibility to abide by its promise to keep it safe and not misuse it. The recent controversy highlights why this is so important.
Facebook has evolved and improved as its business has grown. It has responded to pressure to improve the transparency of user settings and invested heavily in security and removing harmful and fake content. The company is also trying to mitigate the negative unintended consequences of bad actors on its platform (which is unfortunately inevitable) and maximise the positive impact of good actors.
We continue to monitor and evaluate the news flow around Facebook. We will change our view if this situation evolves into something more serious, such as evidence of the company being grossly irresponsible or directly complicit in a negative act. Likewise, we will change our investment view if there is evidence of meaningful numbers of users voting with their thumbs and deleting Facebook’s platforms from their lives.