The FTC Is Turning Its Attention to Facebook (Again). Should Investors Be Worried?

Facebook, which was recently rebranded as Meta Platforms (META -11.05%) has had its fair share of difficulties with the Federal Trade Commission (FTC) in the past. Should investors be concerned about recent reports that the FTC is reviewing the company's disclosures to determine whether it violated a previous agreement with the agency? In this segment of Backstage Pass, recorded on Oct. 27, Fool contributors Rachel Warren, Trevor Jennewine, and Brian Withers discuss. 

Rachel Warren: We are 30 minutes through the hour. We're going to dive into our third question. The Wall Street Journal reported today that the Federal Trade Commission is scrutinizing Facebook disclosures. According to The Journal, Federal Trade Commission staffers has begun looking into disclosures that Facebook internal company research had identified ill effects from its products according to people familiar with the matter. "Officials are looking into whether Facebook research documents indicates that it may have violated the 2019 settlement with the FTC over privacy concerns for which Facebook paid a $5 billion dollar penalty."

Obviously, Facebook has faced its fair share of scrutiny lately in light of the blistering testimony from whistleblower, Frances Haugen, on Capitol Hill, and the ongoing investigation by lawmakers. It's also been reported that British lawmakers and parliament are investigating these allegations. In Facebook's third-quarter 10Q report, they briefly alluded to these ongoing investigations.

They said, "we became subject to government investigations beginning in September 2021 and requests relating to a former employee's allegations and release of internal company documents concerning, among other things, our algorithms, advertising and user metrics, as well as misinformation and other undesirable activity on our platform." Facebook is dealing with a bit of a hailstorm right now.

I have a couple of questions to follow-up to this. First, does this latest chain of events regarding Facebook and its potential FTC violation concern you about the future of the stock? Then just as a follow-up to that, is there another stock you're worried may face similar regulatory challenges in the future? Trevor, why don't you go first?

Trevor Jennewine: Sure. Thanks, Rachel. As far as the future of the stock, that is a great question. I personally have never invested in Facebook. I think David Gardner and other investors, I've read quotes that are basically invest in the world you want to live in and for all the reasons you just mentioned, I think that there's a lot of toxicity to Facebook.

I've been fascinated with all these articles The Wall Street Journal has been publishing recently, and they've hit on other problems too. Like the platform being used by drug cartels to recruit, train, and pay hitman, being implicated in human trafficking. Just terrible, terrible things and then the follow-up was that management's response has been weak.

They are aware those things are happening and then the response is weak, that's concerning. From a financial perspective, Facebook is an incredible company. They have an incredible business model. They're the second largest player in the world in terms of digital ad revenue.

Second only to Alphabet's, Google. I think Mark Zuckerberg is a brilliant founder, he had a great idea and turned it into a massive company. Nothing bad to say about it from a business perspective. I just think that the platform itself creates a lot of negativity, so it's never really been something I wanted to invest in, if that make sense.

As far as the future of the stock, I could see it going either way. Facebook always seems like they've always been dealing with trouble from one angle or another, and they do provide a valuable service to small and medium-sized businesses. They're not generating that much money for nothing. Those small and medium-sized businesses are getting value from Facebook.

They're helping drive growth in lots of different industries around the world. But I could certainly see this coming back to buy Facebook. In the same line, I think other companies that fall into that walled garden category, like Alphabet's Google, could see similar regulatory scrutiny in the future. Just because it's a black box, they own so much of the ad ecosystem and they work with buyers. They work with publishers. They own the ad exchange.

They own the tools that buyers and sellers use to buy and sell ad inventory. When you upload your data into Google's platform, Google takes the data and uses it for itself. Jeff Green, the CEO of The Trade Desk, compares Google's business model to grading your own homework and I think that's a very apt description.

I could see regulatory scrutiny coming to some of the other ad tech companies as well. The big walled garden ones. What are your thoughts, Brian?

Brian Withers: I'm with you on the opinion of Facebook, and I don't want to rant and bash Facebook too much here, but for those shareholders, I keep going back to Microsoft. Microsoft was drug in front of the federal government and for a long time had asked Microsoft to split up its business because of its monopolistic practices and whatnot.

That was like ten years where Microsoft ended up fighting these charges in court and the legal battles, and at the end of the day, they acquiesced to some things and changed a few things. But it didn't affect the business really one bit other than it was just a massive distraction and money for legal fees and whatnot. If you look at Facebook's latest earnings report, I just pulled it up.

They had net income. This is the bottom line. After they've subtracted all their costs off, $9 billion dollars. Just like mind-blowing. I don't think there's anything that the regulators can do. I appreciate the whistleblower coming forward and she was incredibly believable, and Facebook is doing everything they can to discredit her. I think that's just terrible. I just want them to step up and do the right thing.

With $9 billion dollars that they put in their pocket after the end of this quarter, they can spend a billion dollars every quarter for the next couple of years and it wouldn't impact their financials like one bit. I'll go back to a quote from the Spiderman movie and I don't know if this originally came from Spiderman or not.

But with great power comes great responsibility, and I want Facebook to step up. Rachel, you want to talk about Facebook first then we'll come back to the other company.

Warren: Absolutely. Yeah, I agree with both of you. I think Facebook's platform is a double-edged sword in some way. I think on the one hand you've got this great medium for people to keep in touch, to connect with other people. But I think that it can also be this incredibly toxic place where there can be a lot of damage and real-world harm.

If Facebook has had all of this data as the whistleblower alleged showing that its platform was causing these issues, and chose to hide it, or tried to hide that from the government or investors, I think it has a lot of explaining to do. I love that quote from Spiderman.

But it's true. Obviously, this is a company, it operates to turn a profit. But it also has basically crept its way into every aspect of daily life for people all over the world. Facebook is where people connect with loved ones, where they meet people, that's where they read their news. Maybe, I don't know, you buy and sell things in your local neighborhood.

You can do everything on Facebook. I think that induces a certain level of responsibility, and I think that it's very questionable as to whether or not Facebook is living up to that responsibility.

I personally don't think in the near-term at least that this is going to have a really detrimental impact on the company's top or bottom line. This company is just great cash flow, top and bottom-line growth, continuously quarter-after-quarter, year-after-year.

I think that's actually part of the problem is you have from a financial perspective, from an investment perspective, these are companies that are doing great because they have such a monopoly. From the human level perspective, that's exactly the reason why it is so impossible to regulate them and to keep those issues in check.