Facebook in the process of defriending trust of users

You can’t put a price on trust, but for Facebook, at least, the lack of it is getting expensive.

About 1.4 billion people log into Facebook on a daily basis. Picture: AFP

You can’t put a price on trust, but for Facebook, at least, the lack of it is getting expensive.

That was readily apparent on Monday, when Facebook’s share price slid nearly 7 per cent, making for the stock’s worst single-day drop in at least four years. That equated to more than $US36 billion ($46.7bn) in market value lost as politicians erupted in fury over the latest scandal involving the company’s role in the contentious 2016 US presidential election as well as the UK’s Brexit vote months earlier.

Facebook was under intense scrutiny already. Revelations that user data found its way to a third-party analytics firm that was using the information for political purposes sparked a fresh round of criticism. EU officials have promised a probe, while several US politicians are calling for the same. The company says it already has suspended Cambridge Analytica, the firm in question, over the issue.

About 1.4 billion people log into Facebook on a daily basis, and the company has reliably grown that number by double-digit rates every year since it went public in 2011. That impressive expansion has allowed Facebook to quickly build up an advertising business now generating $US40bn a year in revenue.

But that business is based on trust — specifically trust from users that their private information won’t be used for malicious purposes. The swirling controversies around the social network’s role in election campaigns and public discourse cuts to the core of Facebook’s value proposition — particularly if it causes users to curb their activity on the network. But Facebook’s immense scale also has made it virtually impossible for alternatives to catch on. That, in turn, makes abuse of the platform more urgent for politicians.

How precisely they may do that remains unknown, which is why political risk is difficult for investors to model. Facebook’s current multiple of just under 24 times forward earnings is near a record low and could appear tempting to those drawn to the company’s strong growth and enviable profit margins. The stock now even trades at a slight discount to Microsoft, a one-time tech juggernaut that dominated a previous era with its own long history of tangles with politicians.

But consider that Microsoft also carried a similar multiple in 2003, when the EU issued its first big fine against the company, alleging anti-competitive behaviour. Microsoft’s valuation then collapsed by nearly 30 per cent over the next four years as the company’s battle with regulators intensified, even though its business grew about 60 per cent during that same time. A similar drop for Facebook might look unlikely at this stage, but it can’t be written off. Broken friendships don’t mend overnight.

The Wall Street Journal