Facebook’s stock has too much regulatory risk, this portfolio manager says

Facebook co-founder Mark Zuckerberg poses a question during the CEO Summit. (Official White House Photo by Pete Souza)

If you’ve been a Facebook (Facebook Stock Quote, Chart NASDAQ:FB) shareholder for a while now, it might be time to pat yourself on the back and cash in, says Zachary Curry of Davis Rea, who argues that soon enough regulatory pressures are going to be cutting into the company’s growth profile.

“Our view is that increased regulatory pressures will affect companies like Facebook,” says Curry, president and portfolio manager at Davis Rea, to BNN Bloomberg on Tuesday. “They are such a dominant player, they have so much information, so much data, that there really is a risk of the government coming in and saying, ‘Here is how we’re going to regulate you.’”

A new report from the UK concludes that companies like Facebook, Apple and Google need to be active in controlling the proliferation of so-called fake news sources on their platforms. Commissioned by the British government, the report included contributions from publishers, advertisers, journalists, academics and industry groups, finding that state regulators should have a role to play in making sure that social media companies offer trustworthy news sources on their platforms, arguing that, “This task is too important to leave entirely to the judgment of commercial entities.”

Curry says that another major privacy or data breach by Facebook could be the last straw needed to push governments into action. “The data scares that they’ve had, I think they’ve had enough of them that might cause [regulatory actions] accelerate a little bit but I don’t think we’d see another data scandal where there would be a fine or punishment because I think that that would’ve happened already,” he says.

“The positive on Facebook is that their growth numbers are great. In terms of small business, advertising, they can do it on Facebook for a very small amount of money and have it be very effective and you know where your advertiser dollars are going,” says Curry.

Facebook’s share price rose ten per cent in late January with the company’s latest earnings report, which featured consensus beats for both its top and bottom lines while at the same time showing evidence of growth in daily active users across all geographic regions. The stock is now up almost 26 per cent for 2019.

“We’d be very cautious on the name,” says Curry. “If you’ve had a big position and you’ve enjoyed the ride so far, perhaps selling some of it might be a prudent option.”