While Facebook will face further challenges over its management of data, the long-term investment prospects for the social media giant remain attractive, according to Allianz Technology Trust manager Walter Price.
Facebook was up by more than 50 per cent during 2017 as investors snapped up shares in the so-called FAANG – Facebook, Amazon, Apple, Netflix and Google parent Alphabet – group of technology stocks.
However, the company has been hit by claims that UK political consultancy Cambridge Analytica allegedly harvested data from 50 million users to target US voters with political advertisements personalised to their psychological profile.
Since the claims emerged, Facebook’s share price has slumped as authorities have demanded explanations over how the firm uses data.
As the below chart shows, the company’s share price has fallen by 13.02 per cent over one month.
Performance of stock over 1 month in US dollars
Source: FE Analytics
Walter Price, global co-head of the Allianz Global Investors technology team and manager of the Allianz Technology Trust, said the company is likely to face further challenges over data protection regulations.
Price said measures such as the EU’s General Data Protection Regulation (GDPR) is likely to add further protection for users and change the way Facebook gathers data.
“We’ve been concerned that you’re going to need much more explicit permission from users about using their data and reusing it for your advertisers on the platform,” he said.
The US-based fund manager said the Cambridge Analytica scandal had shed more light on how much data had actually been harvested and that it was likely to lead to extra costs in the form of data management systems.
“I think the company’s been maybe a little naïve about data and user protection,” said Price. “Their attitude is ‘you’re getting this great service for free and of course you‘re going to have to give us something in return’ and that is the ability to use your information to direct adverts that are relevant.
“That’s a nice concept but at this point Facebook has a dossier on 1 billion people and that’s equivalent to what any government has on their citizens in terms of understanding what they do, buy, and the sort of things they’re interested in.”
He added: “I think users would be startled if they knew all the info that Facebook has accumulated on them.”
The platform has 1.4 billion daily active users, mostly outside the US, including 277 million European users, according to its most recent quarterly filing.
Price said the company will have to cede some control to users over their personal data, while also ensuring they have an effective advertising programme.
Until the Cambridge Analytica scandal there had been fewer rules over the collection of data enabling them to “push the limits… pretty far”.
The Allianz manager said: “I think they’re going to have to dial that back and that means maybe their targeting isn’t quite as comprehensive but I still think it’s much better than other alternatives that advertisers have.”
Facebook revenue by user geography ($m)
Source: Facebook
While the majority of daily active users are located outside the US & Canada, it is by far the biggest advertising market and generated $6.3bn in revenue alone during the fourth quarter of 2017.
Price said the recent revelations will ensure users now better understand the social media platform’s business model.
The manager said policies such as the EU’s ‘right to be forgotten’ and the ability to opt out of data collection may make the platform less effective for advertisers but it will still provide a strong offering.
“Will that mean they still can’t do very effective advertising and advertisers won’t use them? No, I think people will still use them,” he added.
While Facebook was previously a top holding for Price in the four FE Crown-rated Allianz Technology Trust portfolio, he has reduced exposure more recently.
“We still hold some Facebook and I think the stock is quite cheap on estimated earnings but I think estimated earnings have to come down as the additional costs that Facebook is experiencing gets ratchetted into the expectations,” the Allianz Technology Trust manager explained. 
“One-time fines are probably not something investors are concerned about but ongoing costs associated with the business and restoring some trust in advertisers is necessary.”
During the fourth quarter general & administrative costs represented just 5 per cent of revenues and remained below 10 per cent during the course of the year.
Price (pictured) added: “I don’t think that the earnings estimates some people have out there are too high, but I think the stock is good value on a long-term basis at this point.”
The manager, who has overseen the £343.1m trust since April 2007, invests in a portfolio of global technology stocks but has more recently focused on stocks in the enterprise technology space.
“You have the capability of new products that enable productivity and you have demand and supply coming together to meet it,” he explained recently.
“I think the result is that we’re embarking on a very favourable period for enterprise technology, [which] is going to last for another decade. It’s not like a one-year [trend], it’s going to last for a long period of time.”
Under Price the trust has delivered a total return of 436.59 per cent since April 2007 compared with a gain of 237.46 per cent for the average IT Tech, Media & Telecomm trust, as the below chart shows.
Performance of trust vs sector under Price
Source: FE Analytics
Allianz Technology Trust has ongoing charges of 1.15 per cent including a performance fee, according to the Association of Investment Companies. It has no gearing and is trading at a 1.4 per cent discount to net asset value.