All great empires reach their zenith at some point, their moment when they stand at the peak of their power and glory, the epoch before they begin their inevitable decline.
For investors in blue chip success stories, part of the skill is judging when that decline begins, when to sell before it is too late. For holders of Facebook shares, this may be that time.
It is probably still too early to tell, but a scandal that has erupted in the UK may have serious implications for Facebook and the way in which it manages political advertising. UK political consultancy Cambridge Analytica is currently fighting off allegations made in a UK television documentary about the tactics it said it was prepared to adopt in an effort to support a potential client.
Cambridge Analytica is likely to face further questions from the UK Data Commissioner on the way it has been using data from Facebook. With the EU currently poised to bring in draconian new data protection legislation, these are very serious questions for both Cambridge Analytica and Facebook.
Facebook shares will become hostage to a political saga
Facebook has already been dragged in front of the US Congress to face questions about how it allowed Russian propaganda specialists to attempt to influence the outcome of the 2016 election. With US mid-terms due later this year, Facebook will be facing much tougher scrutiny of its relationships with firms like Cambridge Analytica. If anything, it looks like Facebook and companies like it are going to have to face the prospect of much tougher regulation which will also hamper their profits.
All this news is bad for Facebook shares, which sustained a loss of over 8% in US trading on Monday. In overnight trading they sank further, and as markets opened in Europe this morning were trading at the 170 level. It represents the biggest short term loss for Facebook shares since 2015.
Facebook is also now likely to face questions from the British Parliament about how it allegedly provided access for Cambridge Analytics to the details of more than 50 million private individuals.
Tougher rules on information sharing likely
According to one analyst at GBH Insights, Facebook is going to have to come up with some much tougher rules on information sharing.
Even over the three month picture, this is a steep drop in the value of Facebook as a company. Facebook stock had been trending up nicely from the 140 level over the last 12 months. But this fall even beats the plunge in share prices we saw in early February, which we feel were driven by wider market volatility issues rather than issues affecting Facebook as a company.
Can the Facebook share price survive this?
This, however, has much bigger implications, not only for the way in which private data is managed and consumed commercially in the western world, but also for Facebook’s ability to maintain its primacy as an advertising platform. Politicians in both the UK and the US and likely further afield will be asking more serious questions of Facebook now and we are very likely to see further legislation passed that will cramp its style.
Will we see the Facebook share price back up at the 185 peak? Much will depend on how this scandal plays out, but right now we see the long term business case for Facebook being seriously undermined.