Social media stocks to see further sell-off because more data issues will come to light, fund manager says

  • "Facebook right now is the epicenter of the data (scandal). I don't think that they are the only company that has done this," Patrick Armstrong, CIO at Plurimi Investment Managers, said.
  • Cyrus Mewawalla, head of thematic research at GlobalData, said different regulations in the U.S. and Europe could cause a "splinternet."

Social media stocks are likely to see further sell-off with more data privacy issues likely to come to light, one investment manager told CNBC on Thursday.

Patrick Armstrong, chief investment officer at Plurimi Investment Managers, said the recent fall in technology stocks may not be enough to convince investors to buy back into the sector.

"We think there's another leg in the sell-off to come in the social media companies. There's enough issues facing them right now that I don't think people are going to pile in and buy the dip," Armstrong told CNBC's "Squawk Box Europe" on Thursday.

The investment manager said that Facebook is unlikely to be the only company to run into issues around data privacy.

"Facebook right now is the epicenter of the data (scandal)," he said. "I don't think that they are the only company that has done this. I don't see how Alphabet can be as big as it is and not have its own issues that are going to come out.

"And probably all the social media companies are going to have issues like this. So we haven't seen that happen yet, I'll be shocked if we don't get a follow on on that.

"I think it's not going to change any of their business models. I don't think it's going to have any long-term disruption, but I think that will create a better entry point for share prices."

Facebook is still facing the fall-out from the Cambridge Analytica data scandal in which 87 million user profiles were harvested for data that was passed on to the political consultancy. Facebook CEO Mark Zuckerberg faced his second day of questioning from lawmakers on Wednesday, when he was grilled on the company's business model, future regulation and privacy.

'Splinternet' 

One of the biggest concerns creating a black cloud over the tech sector is the specter of regulation. The European Union's new General Data Protection Regulation (GDPR) comes into force on May 25, which will theoretically give users more control over their data.

Zuckerberg said Wednesday that regulation is "inevitable" but lawmakers need to be "careful" about what regulation is enacted. Many analysts believe regulation could be a headwind for internet stocks.

"The internet advertising model is under attack and regulation itself is under attack. And I think you'll see the 'splinternet,' which is our definition of the fragmentation of the internet all around the world, which in some jurisdictions like perhaps Europe, regulating the internet more than others like perhaps the U.S.," Cyrus Mewawalla, head of thematic research at GlobalData, told CNBC's "Worldwide Exchange" on Thursday.

"Regulation will place compliance costs upon Google, Facebook, Amazon, these big companies who use big data for AI and other internet advertising purposes," he added.

Analysts at Bank of America echoed a similar sentiment earlier this week on regulation of the tech sector.

Valuations 'still supportive'

The technology sector performed extremely strongly in 2017, but many of the biggest stocks have had a tough start to the year. Facebook is down nearly 6 percent year-to-date and Alphabet has fallen nearly 3 percent. But others have managed to post gains. Netflix is over 58 percent higher this year while Amazon is up around 22 percent.

Despite some pressure on technology stocks, over the longer term, analysts expect them to continue rising.

"If you look at the U.S. tech sector, it's been on a fantastic run there, we've really liked the momentum there and we see the long-term positive attraction to the sector," Gerard Fitzpatrick, EMEA chief investment officer at Russell Investments, told CNBC's "Squawk Box Europe" on Thursday.

"If we look at the longer term, the usage rates, the growth outlook for the tech sector we see that as strong. And on the valuation side, are we are like we were in the dotcom era? No, we're not. Valuations are not as extreme as there and we still would be supportive."