What do the Facebook revelations mean for tech stocks?

It’s not been a good few weeks for Facebook. The recent revelations about Cambridge Analytica’s use of Facebook user data wiped billions off the company’s value in a single day. The scandal could hold consequences both for Facebook and for the way that much of the tech sector uses customers’ data to make money.

In this article, we’ll examine what has happened so far and what the longer-term consequences for the sector could be if customers vote with their feet or governments choose to introduce stricter regulations.

User Behaviour

At the moment, many web companies, but particularly Facebook and Google’s parent company Alphabet, make their money out of the information that their users give them. In particular, this is used to target advertising at specific groups of users.

If users become reluctant to give as much data to these companies as they do now, their ability to target ads will be reduced. This will mean that advertisers will pay less for each click on an ad since the certainty with which they can target users is reduced. This would significantly dent tech industry profits and likely lead to a fall in the value of companies.

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Government Actions

Government pressure on companies like Facebook and Google has been building for a significant amount of time. The Cambridge Analytica revelations could turn out to be the straw that breaks the camel’s back when it comes to tighter regulation of the sector.

Again, these changes would likely concern the type of user data that these companies are able to collect and process. Google is already under pressure from the European Union’s upcoming GDPR regulations, which some analysts have forecast could cut the company’s income by up to 2%. Tighter regulations, particularly in the United States, could do even more damage to future revenue projections for these companies.

The Future?

At the moment, speculation has driven these stocks lower and there is little concrete information about what governments and consumers will do. Investors should be braced for a rocky ride though as the Cambridge Analytica revelations are unlikely to be the last of their kind.

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