Facebook (NASDAQ:FB) is already facing a number of challenges. The social network was implicated in spreading fake news articles, some of which were promoted by Russian agencies, to millions of users during the 2016 election. In the subsequent Congressional hearing, Facebook admitted that it didn't always know who was buying ads on its platform.
Facebook vowed to better police its network and started showing fewer news articles and ads. However, its critics claimed that Facebook's algorithms still created "filter bubbles" that encouraged users to only read, share, or believe news that conformed to their personal opinions.
But that was the tip of the iceberg
Things got worse in March, when it was revealed that the personal Facebook data of about 50 million people was shared with Cambridge Analytica, a data firm hired by the Trump campaign in 2016. Facebook claims the breach stemmed from a personality-quiz app created by Cambridge University researcher Aleksandr Kogan in 2013, which was designed to gather data from users and their friends.
Kogan didn't break any rules with that app, but he then violated Facebook's policies by sharing the accumulated data with Cambridge Analytica in 2015. This revelation ignited a firestorm of fresh criticism, with the Federal Trade Commission readying a probe and WhatsApp founder Brian Acton -- who sold his app to Facebook in 2014 -- joining the trending hashtag #DeleteFacebook on Twitter.
After remaining silent for nearly a week, CEO Mark Zuckerberg issued an apology on Facebook, stating: "We have a responsibility to protect your data, and if we can't, then we don't deserve to serve you." Zuckerberg stated that the Facebook Platform APIs that let Kogan access the data of millions of users were already altered to counter abusive apps in 2014.
Zuckerberg said that Facebook would investigate all apps that had access to large amounts of user data prior to 2014, that it would reduce the amount of data developers could access, and that it would make it easier for users to revoke access from connected apps.
So should investors buy the dip?
Facebook's stock was hammered for two days, on March 19 and 20, after the Cambridge Analytica story broke. Between March 16 and its lowest point on March 20, the stock tumbled 12%.
Therefore, many investors who previously avoided Facebook's high-flying stock -- which more than doubled over the past three years -- wondered if it was time to buy the dip. The answer is simple if you recall Steve Jobs' words to his biographer Walter Isaacson in 2011.
Jobs stated: "We talk about social networks in the plural, but I don't see anybody other than Facebook out there. It's just Facebook -- they're dominating this." That statement rings even truer today.
Facebook now has 2.13 billion monthly active users (MAUs) -- nearly a third of the world's population -- which gives it a moat as wide as the Grand Canyon. Some users might delete their accounts in protest of its privacy gaffes, but at the end of the day, there's simply no other social platform that matches Facebook's reach.
Some users might view Instagram as an "alternative" platform, but Facebook also owns that app, which has over 800 million MAUs. Moreover, most of Facebook's users are overseas, and could likely care less about the 2016 election or Cambridge Analytica.
That's a strength Facebook shares with Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google. Google's users will often grumble about the search giant collecting their personal data to craft creepy targeted ads, but they won't stop using it for online searches. Just as Google remains the default tool for most internet searches, Facebook will remain the default tool for social networking connections.
Why investors should buy the dip
This leaves us with two simple questions: Is Facebook still growing, and is the stock reasonably valued?
Wall Street expects Facebook's revenue and earnings to both rise 36% this year. The stock trades at 24 times forward earnings, which indicates that it's undervalued relative to its growth potential.
I doubt that Facebook's ad sales will be seriously impacted by recent events. Facebook and Google are the two biggest names in internet advertising, and Facebook often throttles the number of ads displayed across its network to boost the prices of its individual ads. Therefore, fewer ads don't necessarily equal lower revenues.
Facebook has a lot to answer for, but I think any news-related dip represents a buying opportunity in the company that essentially defines the modern social networking industry.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Twitter. The Motley Fool has a disclosure policy.