Tech reg revisited: A look at the tech sector after Zuckerberg’s visit to DC

E*TRADE Securities2

04/20/18

Mr. Zuckerberg goes to Washington 

A few weeks ago we wrote that the US Federal Trade Commission had opened a non-public investigation into Facebook’s handling of personal user data and privacy practices. The investigation came in the midst of the developing Cambridge Analytica scandal, where the political consulting firm was accused of misappropriating Facebook data for use in political ad targeting.

Just last week, Facebook CEO Mark Zuckerberg made his way to Capitol Hill to testify before a congressional committee and defend Facebook. He made promises to provide suggestions to lawmakers regarding regulations for the social media industry and to consider privacy reform.

So is the party coming to an end for the social media darling of Wall Street? The tech sector has had quite a run relative to the broader market, fueled in part by Facebook’s rise. But as pundits begin to question whether or not to pluck the F out of their FANG portfolios,1 now is a good time to dig into what was said—and not said—during and immediately after the congressional testimony, to learn what the future may hold for Facebook and its peers.

Constituents are concerned

While the testimony may have helped stop the bleeding, it seems there is a public backlash in the works that has struck a chord with lawmakers. Consider the poll Gallup released from last week showing that US Facebook users are increasingly concerned about invasion of privacy, with 43% of users currently very concerned about their privacy, up from 30% in January 2011.2 On the first day of the hearings, Senator Ed Markey of Massachusetts echoed this sentiment saying, “Facebook now has to deal with how much people understand about how vulnerable all their information is and how few protections are on the books. So, I do think this is a legislating moment.”3

Is regulation a sure thing?

During the trial, Zuckerberg conceded that government regulation may yield benefits saying, “I think the real question as the internet becomes more important…is what is the right regulation?” Some potential areas of regulation he noted include transparency requirements for data use, mandates for user control over their data, and protections for innovation.4

So while it may seem bold that Zuckerberg would advocate for regulation, there is a bit more at work here. Zuckerberg is already trying to frame the type of regulation the social media industry would face, and at first blush it seems we’re talking about disclosure requirements and user experience improvements more than a full-cloth change in business practices. Should regulation go down this path, Facebook’s business model would likely remain intact.

A prolonged timeline

For investors worried about any immediate impact to their portfolio, it’s important to note that some think it will be years before we see changes. Gene Kimmelman, president of Public Knowledge stated, “Even with this strong bipartisan consensus that there’s a large problem that needs legislative action, it would be extremely difficult to pass a law in this environment.”5

FB’s stock performance suggests the street agrees: After the final day of hearings, Facebook’s stock price closed 5.5% higher than it had opened just a day before.6 To be sure, FB has some ways to go before making up for March losses, but it seems that, for now, Zuckerberg has helped ease investor fears of a tech regulation Armageddon, or investors have simply shifted focus to a new headline.

An important wrinkle

While the senators and congressmen parse out the details of what regulation may look like, many major indexes already announced in January that they would be rebranding the telecommunication services sector as the communications sector.7 The reclassification will not occur until the end of September 2018, but the change will see some stocks move, including Facebook and Alphabet leaving the information technology sector.

Alphabet and Facebook’s move will not only change the weighting of the technology sector—currently sitting at around 25% for the S&P 500®—it will also redefine what investors have come to expect from a sector usually associated with high earnings and valuations. Those investors with index funds in their portfolio may want to stay abreast of the holdings changes and potential for performance differences later this year, keeping in mind it may not be on account of Washington’s ire. 

Bottom line

Zuckerberg’s trip to Washington was nothing if not headline-grabbing. And while sensational testimonies make for great news, rarely do they make for compelling reasons to stray from one’s long-term investing plan. As always, maintaining a well-diversified portfolio mapped towards one’s goals and risk tolerance is a good way to ease concerns about the unknown.


 

1. Wursthorn, Michael. “Stock Pickers Ready to Take the Facebook Out of ‘FANG’,” Wall Street Journal, 16 Apr. 2018.https://www.wsj.com/articles/some-stock-pickers-are-ready-to-drop-the-f-in-fang-1523871001?dlbk&te=1&nl=dealbook&emc=edit_dk_20180417

2. Jones, Jeffrey M. “Facebook Users' Privacy Concerns Up Since 2011,” Gallup, 11 Apr. 2018. http://news.gallup.com/poll/232319/facebook-users-privacy-concerns-2011.aspx

3.Shields, Todd, Steven T. Dennis, and Sarah Frier. “Senators Tell Facebook CEO the Days of Self-Regulation May End,” Bloomberg, 11 Apr. 2018. https://www.bloomberg.com/news/articles/2018-04-11/senators-tell-facebook-ceo-the-days-of-self-regulation-may-end

4. Seetharaman, Deepa and John D. McKinnon, “At Facebook Hearing, Senators Warn Mark Zuckerberg of New Regulations,” Wall Street Journal, 10 Apr. 2018. https://www.wsj.com/articles/at-facebook-hearing-senators-signal-interest-in-more-tech-regulation-1523390133

5. Timberg, Craig, Tony Romm, and Elizabeth Dwoskin. “Lawmakers agree social media needs regulation, but say prompt federal action is unlikely,” Washington Post, 11 Apr. 2018. https://www.washingtonpost.com/business/technology/lawmakers-agree-social-media-needs-regulation-but-say-prompt-federal-action-is-unlikely/2018/04/11/d3ce71b0-3daf-11e8-8d53-eba0ed2371cc_story.html

6. Balakrishnan, Anita. “Zuckerberg Wins on Wall Street: Facebook shares have best day in 2 years,” CNBC, 10 Apr. 2018. https://www.cnbc.com/2018/04/10/facebook-fb-stock-zuckerberg-speech-in-washington.html

7. “S&P Dow Jones Indices and MSCI Announce Revisions to the Global Industry Classification Standard (GISC®) Structure in 2018,” MSCI, 15 Nov. 2017. https://www.msci.com/documents/10199/d56e739d-4455-4bc1-afdd-d738c2ce5a05