Facebook has been the worst performer of the much-ballyhooed FAANG stocks so far this year, thanks to a private data scandal that’s dragged its stock now nearly 5 percent in the year-to-date compared to a 33-percent climb by Amazon, a 1-percent drop by Apple, a 75-percent climb by Netflix and a 4.3-percent rise by Alphabet.
FB Stock vs. FNG ETF YTD Returns
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Source: CNN Money
Facebook has been clearly hurt by the March 17th revelation that its API permitted Cambridge Analytica to use a personality-quiz app to collect personal data from more than 50 million users. Traders dumped the shares due to rampant fears that the scandal could prompt FB users to leave en masse. They haven’t, really, but this is far from over.
FB stock managed to pare back some of those losses after CEO Mark Zuckerberg appeared before Congress and answered tough questions about the company's private data policy as well as Russia's attempt to interfere with the 2016 U.S. presidential elections.
The fact that recent surveys conducted by Wall Street have shown insignificant attrition of Facebook's userbase or loss of engagement after the scandals has been encouraging some long-term investors to pull the trigger at these low levels. Related: Bitcoin’s Breakout Is Not As Bullish As it Seems
But a deeper look reveals there's more to FB stock than mere weakness as a result of the company mishandling consumer information. Indeed, Facebook's technical charts tell a tale of failed breakouts and a lagging relative strength line that dates back to mid-2017--well before the scandals unfolded.
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Source: The Street
The first sign of trouble appeared in August when FB stock stopped outperforming the broad-market S&P 500, only managing to match the benchmark's performance.
By November, Facebook's RS line started trending lower, indicating that it was underperforming the market--a clear red flag.
Facebook flew out of the traps after starting 2018 on a well-defined uptrend. The shares were, however, unable to complete an attempted breakout, which is a sign of continuing weakness.
The shares continued flashing mixed signals during the February deep market correction, holding the early-year uptrend but closing below the 10-week moving average on elevated volume on February 9.
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The shares finally gapped below their 50-day moving average on large volume in March when the Cambridge scandal hit, breaking below critical support levels and signaling that sellers were firmly in the driver's seat for the first time in more than a year.
It will take some time for FB stock to climb from its deep pit and the bulls to take charge once again. And that depends on how events unfold from here.
A Looming Wall of Worry
Data scandals might soon prove to be the least of FB's worries.
The General Data Privacy Regulations (GDPR) is poised to take effect in May 25 and might present a severe test for Facebook's revenue model.
GPDR promises to become the biggest private data shakeout and a true seismic shift in how companies like FB monetize private data.
The long and short of it is that consumers will be able to request all data collected by companies and have the power to revoke consent if they feel like it. That might interfere with FB's phenomenal ad-targeting capabilities and topple its gravy train.
Facebook's superior ability to monetize its millions of users is the key reason why the shares have been on a tear.
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Source: Statista
Wall Street has remained bullish on FB stock through all the snafu, with RBS, Cowen, UBS and others issuing buy ratings. But probably only long-term investors with deep profit cushions will be able to sit through the prolonged base-building period that is likely to ensue from here.
By Alex Kimani for Safehaven.com
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