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Facebook regulatory risk is higher after big data leak, says analyst

Key Points
  • Stifel's Scott Devitt says investors should focus on whether users trust Facebook versus doing valuation analysis.
  • "The advertising companies are the ones that are more explicitly using the data in ways that regulators may target initially, which puts those stocks and Facebook … more at risk in the near term than commerce companies," he says.
Mark Zuckerberg, CEO, Facebook
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Stifel's Scott Devitt believes Facebook will face more government scrutiny after Cambridge Analytica's alleged misuse of the company's users' data.

"Regulation in every industry is ultimately bad. And the internet companies broadly have had 20 years of lack of regulation," Devitt said Monday on CNBC's "Halftime Report." "We're heading into a new world as it relates to regulation."

"The advertising companies are the ones that are more explicitly using the data in ways that regulators may target initially, which puts those stocks and Facebook … more at risk in the near term than commerce companies," he said.

The analyst downplayed valuation analysis for Facebook. He said investors should focus on user sentiment toward the company.

"The risk here is that Facebook is not focused enough on its product or its user, and this is a network-effect business. Network effects work in both directions. All you have really is the trust of your user. If you lose that, you're done," Devitt said.

"Trust is paramount to the future of this company," he said. "That's what is significant here. That's what is truly at risk."

On Friday night, Facebook announced in a blog post that the company had suspended political analytics research firm Cambridge Analytica from its platform, suggesting it had not been honest about deleting user data sent to it by the makers of a popular psychology test app. The New York Times reported the data firm was able to acquire 50 million people's Facebook profile data without their consent.

Facebook shares declined 6.8 percent Monday. Its stock has been one of the best-performing large-cap stocks in the market. The company's shares rallied 32 percent in the past 12 months through Friday versus the S&P 500's 16 percent gain.

Devitt earlier reaffirmed his hold rating and $195 price target for Facebook shares in a note to clients.

Facebook did not immediately respond to a request for comment. The company said "the claim that this is a data breach is completely false" in its blog post, saying no systems were hacked and no data was stolen.

On Saturday Cambridge Analytica denied misusing the Facebook data for Donald Trump's 2016 presidential campaign.

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