Is the Market Mad Enough About Facebook's Data Debacle?

In this MarketFoolery podcast, host Chris Hill is back from SXSW and ready to rejoin the fray with Million Dollar Portfolio's Jason Moser and Stock Advisor Canada's Taylor Muckerman.

In this segment, they discuss the blowback from the startling revelations that Facebook (META -10.56%) inadvertently gave unauthorized access to an enormous amount of user data to a company that used it to promote Donald Trump's candidacy in the 2016 election. The blow to its image took a bite out of its share price, but these Fools are more interested in the long-term impact -- and, yes, they do foresee some. What will the company and Mark Zuckerberg do?

A full transcript follows the video.

This video was recorded on March 19, 2018.

Chris Hill: Shares of Facebook down 6% this morning. Pick your headline, guys. I'm going with the one from U.S. News & World Report. "Facebook Data Debacle Spooks Investors." This, of course, refers to the New York Times report that an outfit called Cambridge Analytica got unauthorized access to data from more than 50 million people.

Jason, I'll just start with you. There are times when we come into this studio and we talk about a given news event for a given business, and we all come to the agreement that the headline is worse than the actual issue. "Yes, it's a bad headline for company X, but the underlying issue is not that bad." This actually seems like the reverse. This seems like, the headline is bad, and the underlying issue could potentially be even worse.

Jason Moser: Possibly.

Hill: If they don't handle it right.

Moser: Yeah, and it seems like they're not getting off on the right foot here in handling it. We were talking over the weekend about Snap's (SNAP 2.89%) issues, where just one celebrity comes out and can essentially ruin that business. Facebook is in a bit of a firmer footing, but I do think this is something they obviously need to be laser-focused on, in trying to figure out how to communicate how they plan to respond to this.

I think the biggest challenge Facebook probably faces from this fallout going forward -- because for our purposes here, that's what we care about most, is from the investor's perspective -- going forward, it's the scrutiny of any potential future acquisitions. Up to this point, Facebook's success has really been based on the fact that they're able to bring the most used social platforms under their umbrella, whether it's Facebook proper or breaking out Messenger as a separate app, or acquiring Instagram or acquiring WhatsApp, which, let's be clear, we still don't know exactly how they're going to monetize WhatsApp at this point, so they have a little burden there to bear as well. I think, ultimately, going forward, there's going to be so much scrutiny put on them in regard to any meaningful network acquisition, I honestly would be surprised if they ever were green-lighted ever again to buy a meaningful network because of something like this right here. This really, I think, shows the dangers in a network like this getting too big.

We're at a point now in time where it seems like people care more about the truth as it pertains to their beliefs versus the actual truth. And I guess that's really probably always existed, it's just we used to call it BS, now we call it fake news. But, any which way you cut it, I don't think that's new. I think that technology has just really exacerbated the situation. And that's where we are today.

Hill: And you mentioned Snap. For those who missed it, on Motley Fool Money over the weekend, one of the things we talked about was this ad that they let run on Snapchat that Rihanna, rightfully so in my in most people's opinions, took offense to, and she took to Instagram to blast it -- I think the through line for both Snap and Facebook is that they both had, on their respective watches, they let something slip through. In the case of Snapchat, it's, here's a completely distasteful ad that never should have run on the platform. In the case of Facebook, it is this outside group getting unauthorized access to the data of tens of millions of people.

Taylor Muckerman: Yeah, 50 million, they assume. This is a deep rabbit hole, if you really want to start googling Cambridge Analytica and the connections it has and the influence it has had around the world for elections, not just our own. We're just the latest domino to fall, I think, with regards to Cambridge Analytica. But, all these people did was take a survey for a few dollars, and then the research firm that Cambridge Analytica got the data from, then had access to all of those people's friends' data, even if you didn't give them permission, just through terms of agreement, your friend or your acquaintance taking that survey gave your own data up. I remember over a year ago learning about this and stripping my entire profile of everything other than the friends that I have on it because of this reason. I don't get on it anymore. I didn't give anybody permission. Somebody else out there that decided to take a survey for a couple extra dollars gave--

Moser: This all comes back to people. At the end of the day, this just comes back to people. People who want to try to get in there to manipulate data will get in there and manipulate data. People who want to act unethically will act unethically. And it sounds like, based on the time period of when this happened, it sounds like someone sort of bent the rules or just figured out a way around some guidelines that perhaps weren't really as firm on Facebook's side as they are today.

Bottom line, though, is that users of Facebook are the ones inputting all of that information on a daily basis. You have a choice to not go in there and put your life out there on display for everyone to see. I think that's probably something that a lot of people are going to start to reconsider. I think the world is big and a lot of people want to use it. We are far ahead of a lot of people around the world who haven't gotten to that point yet. There is sort of a novelty there still with social media in some parts of the world. But, at the end of the day, people have to take responsibility for the stuff that they put out there and recognize that if you don't want to be a victim of this, you do have a choice. Probably, at the end of the day, people aren't going to quit using it, I think. Unfortunate, but probably the case.

Muckerman: If they do, it's all that Facebook is built up upon, is other people's data. Without that, this company is a non-starter. And then you talk about some ad-based numbers, it looks like Alphabet and Facebook, finally taking a step back in terms of market share for U.S. digital advertising. Maybe this is part of the reason why, especially with them dropping a lot of news outlets, trying to return more toward that friends and family Feed that they were based upon when they first started.

Hill: Last thing before we move on, Facebook's next earnings report is about six weeks away. Do you think Mark Zuckerberg will come out in the intervening six weeks to address this issue in a bigger way? The word you used, Jason, is the one that I keep coming back to, and that is scrutiny. If you are Alphabet or Amazon, you're breathing a tiny sigh of relief today, because those two companies have been lumped in with Facebook for the last, I would say, year or so, in terms of the question of whether or not these companies are monopolies, and to what extent do they invite scrutiny from Capitol Hill. As of this moment in time, Facebook is far and away the clear leader in that book.

Muckerman: I think he has to. He made it his New Year's resolution to make this company a little bit kinder to its citizens and to the world in terms of the influence it can have. He's done let with learning Mandarin. He learned AI one of his New Year's resolutions. And that's this year's New Year's resolution for him. So, I think to own up to that, he has to get out in front of this personally.

Moser: I was thinking the exact same thing. Had he not made that his New Year's resolution, to "fix Facebook," then we could at least understand if he was going to try to remain quiet to maybe understand the facts as well as possible. But at this point, he has to come out and say something, otherwise he looks like he either doesn't care or is being somewhat lazy or is somewhat scared. And perhaps he's a little combination of all of those three. But, either way, they will need to nip this in the bud.

And again, when you look at Facebook and think about what that whole investment thesis is based on, it's based on people inputting their personal information into a website. So, with Facebook, it seems anecdotal, but speaking with more and more people who are migrating from Facebook to Instagram, I think Facebook is becoming a little bit of a lesser user experience, perhaps riddled with ads, so people are doing more on Instagram nowadays.

Muckerman: It's in the top five -- if you broke it out, it would be a larger digital ad space than Snap, it would be larger than Microsoft, it would be larger than every other competitor other than Facebook and Alphabet.

Moser: Right, and that matters, particularly as we go back to what I was talking about in the beginning, what is Facebook's next big acquisition? They're going to have to come up with something. Messenger is not going to monetize like Facebook or Instagram does. It doesn't, it's a messaging platform. I'm just not sure they're ever going to get there with WhatsApp, either, because of the same premise there. It's a messaging platform. So, they have to be thinking about what comes after Instagram. Not such an easy question to answer. This makes it far more difficult.