Analysis: The Facebook Data Controversy, And Why Wall Street Could Take It Harder Than Washington

After another 5 percent sell-off on Tuesday, Facebook Inc FB stock is now down more than 13 percent in two days following reports that data from more than 50 million users was improperly shared during the 2016 campaign season.

Facebook investors are concerned the company’s data-driven ad business could soon be threatened by harsher regulation, and Height Capital Markets analyst Stefanie Miller said a general trend toward more data protection could be a red flag for Facebook.

Immediate Regulatory Fallout

Miller said in a note that investors can expect Congress to do what it does best in responding to the Facebook data incident—nothing.

“We think Congress is unlikely to intervene with a legislative reaction,” Miller said.

She said the Federal Trade Commission will likely step in with a fine that will large but easily manageable for Facebook; The FTC is already reportedly probing Facebook’s data usage.

More concerning, however, is headline risk and a snowballing trend toward data security regulation. Europe has already taken steps to help protect internet data with the General Data Protection Regulation, which will be implemented in May.

“Facebook must reckon with investors who are upset that the company appears so reckless in the face of focused regulators, and this could be reason enough for portfolio turnover away from FAANG stocks,” Miller said.

Headline Risk Ahead

U.K. lawmakers have already called upon Facebook CEO Mark Zuckerberg to testify in front of Parliament to give his account of the Cambridge Analytica incident. Facebook has suspended Cambridge Analytica for its actions, but the decision is likely too little, too late to please regulators.

Miller said management from Facebook, Alphabet Inc GOOG GOOGL, Twitter Inc TWTR and other tech companies will likely be called to testify before Congressional hearings, which could potentially generate the type of media sound bites that can weigh on investor sentiment.

Alphabet and Twitter shares are down 3.3 percent and 6.8 percent, respectively, in the past two days.

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