Trade of the day time to catch the falling knife on Facebook

What: 

The shares have plummet since data analysis firm Cambridge Analytica harvested the data of millions of users to help President Trump in 2016 elections. 

Profile information of some 50 million Facebook users was compromised, raising series questions over how Facebook handles its customer privacy and how lax its controls are. Facebook is now facing huge scrutiny and a Federal probe over privacy concerns. But is it time to catch the falling knife?

Right now, Facebook faces several strong headwinds. Firstly, from regulators which will no doubt be keen to clamp down on lax controls at Facebook. 

This clamping down could hit advertisers which may find themselves with reduced access to data, making Facebook a less appealing channel for advertising than it is now. Advertising is a key source of income for Facebook, so any hit here could impact heavily on profits.

Secondly, this scandal comes at a time when the business side of Facebook is already showing some signs of strain, as growth among millennials has slowed considerably. Furthermore, reputational damage for Facebook in the eyes of millennials following this security breach will be grave.

However, it is also worth remembering that Facebook is also Whatsapp and Instagram. An increasing number of under 25’s are actually gravitating towards Instagram rather than Facebook – so there are parts of this business which remain intact and very valuable.

Right now, there are still so many unknowns as to how this data scandal situation is going to play out and what the regulatory risks actually are. 

From this point of view, it makes sense to sit on the side-lines for a while longer, until there is more clarity over the risks Facebook faces. However, over the long term, there could still be value in the stock given its group portfolio.

How: 

Facebook has taken a big hit over the last two weeks. It would need to break back above resistance in the region of $170 in order to confirm the bulls are back in control and right now that looks like a big ask.

The current situation could be presenting itself as a short position. Should Facebook break through near term resistance at $150, a move lower towards $140 and then onto $130 could be on the cards.