Question

What do you think of Facebooks recent data scandal? Should this change its long term prospect? If yes, how? It’s shares have dropped by more than 10%. Is it a good time to buy? Explain your reasoning.

Answer 1

With increasing use of internet and technology, the possibilities of data breach has grown many fold. To counter such issues, companies are spending a considerable amount of money for protecting their database. However, misuse of data by internal employees or outside agencies can never be completely ruled out. Whatever may be the reason, it is the responsibility of both the company and its users to understand the risks associated with sharing information online as it is easily accessible by both known and unkown users and can be used in many different ways. Any kind of data scandal can adversely affect a company's reputation in the market as happened with Facebook. It may be difficult for a company operating on such a large scale and having a user network spread across countries to control the damage immediately and rebuild confidence among its users within a short span of time.

It is highly likely that many Facebook users may decide not to use the platform in the near future. However, as the management has accepted its fault and have commuicated to its users that approproiate measures will be taken to avoid any similar event in future, the company may be able to prevent long term damage to its user base and financials. The management should identify the loopholes in the data protection systems and policies and rectify/correct the errors that created the possibility of data breach.

A drop in share price can be viewed as an opportunity as to buy the shares of the company. However, such a decision should be based on company's response to this data breach/scandal. I would not suggest an immediate buying of the company's shares. Simple acceptance of the fault (by the company) will not solve the problem. To restore confidence among its investors and users, Facebook's management will have to implement stringent controls/checks and demonstrate through its actions that such an event will not take place in the future and that the data provided by the users is 100% safe and will not be accessible to unauthorized users/companies. Employees will have to be communicated the importance of user data and how its misuse can impact the company and its prospects in the future. Once the market is confident that the company has done the needful or would be doing what is necessary, I would take a decision to buy the shares.