Question

In: Finance

Since the reveal of the Cambridge Analytica data privacy scandal in February 2014, Facebook’s share price...

Since the reveal of the Cambridge Analytica data privacy scandal in February 2014, Facebook’s share price increased from $60 in February 2014 to around $200 per share in December 2019. During the period, various unfavorable and costly events happened: a few lengthy investigations (internal and external) have been carried out; Facebook CEO Mark Zuckerberg testified before the U.S. Congress in April 2018; Facebook and the U.S. Federal Trade Commission (FTC) agreed to a $5 billion settlement over user privacy violations in July 2019; Facebook were fined by U.K., Spain, and Italy; Facebook revised its privacy policy; etc. However, the scandal did not seem to adversely affect Facebook’s share price over the 5-year period. How do you interpret this observation? What lessons have you learnt from this case about the goal(s) of a company (and its managers)?

Solutions

Expert Solution

I interpret this observation that the stock price valuation of a company is not impacted by different scandals, fines and investigations if all these external events do not have an impact on the operations of the company. Facebook was able to meet analyst’s expectations with regards to its daily and monthly active users. With increasing daily and monthly active users Facebook has been clocking healthy revenues from advertisements. The stock market cares about a company’s revenues, profits and their growth potential and this is what primarily affects the prices of a company’s stock in the market.

The lesson that I have learned from this case about the goal(s) of a company and its managers is that a company and its managers should relentlessly seek growth opportunities and should look at ways of expanding its revenues and profits in future. Focusing on this aspect will help the company maximize the value created by it and at the end of the day this is what matters for the stockholders of the company.


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