The Worst-Case Scenario for Facebook's Political Ad Controversy

Facebook (NASDAQ: FB) has had its share of controversies in recent years. Most notably, back in 2018, the social media company experienced public backlash and legal consequences when it was discovered that a third-party, Cambridge Analytica, had gained access to private data from millions of Facebook accounts during the 2016 election cycle.

Cambridge Analytica was allegedly looking to use this data to help elect Donald Trump as president. Facebook had to pay a $5 billion fine for its involvement in this debacle, the largest fine ever imposed by the U.S. Federal Trade Commission (FTC) for violating privacy rights. This episode is now in the rearview mirror for Facebook, but with 2020 being an election year, the company may face severe backlash for its controversial policy on political ads. 

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Image source: Getty Images.

Facebook's position on political ads

Candidates running for public office can reach a broad audience through social media platforms. However, politicians aren't known to always tell the truth, the whole truth, and nothing but the truth. Indeed, many politicians often stretch the truth -- or even outright lie -- in their ads. But Facebook maintains that it isn't its place to fact-check the claims candidates for public office make in their ads. In the company's own words: "In the absence of regulation, Facebook and other companies are left to design their own policies. We have based ours on the principle that people should be able to hear from those who wish to lead them, warts and all, and that what they say should be scrutinized and debated in public." 

Facebook does, however, argue that its position doesn't imply that politicians can say anything in their ads that appear on its platform. These ads are held to Facebook's community standards, which include restrictions on "hate speech," for instance. Still, the company's policy is different from that of some of its peers.

Twitter (NYSE: TWTR) recently made a move to completely ban political ads on its platform, a decision that was applauded by many. Snap (NYSE: SNAP), the parent company of Snapchat, tried to find some middle ground between the opposing positions taken by Facebook and Twitter. Here's what Snap's CEO, Evan Spiegel, had to say about political ads on the company's popular app: "We subject all advertising to review, including political advertising, and I think what we try to do is create a place for political ads on our platform, especially because we reach so many young people and first-time voters we want them to be able to engage with the political conversation, but we don't allow things like misinformation to appear in that advertising." 

In terms of optics, both Snap and Twitter look better than Facebook in the political ads controversy. Could Facebook's controversial stance come back to haunt it?

The worst-case scenario for Facebook

While Facebook has faced a lot of criticism as a result of its position on political ads, the company has yet to face any real consequences. As Facebook said, without any regulation on the subject, private entities can make their own calls and handle political ads as they see fit. That's why legal ramifications are out of the question. However, the company could face even more public backlash, and the pressure could mount if the idea of boycotting Facebook's platform gains traction. In the worst-case scenario, Facebook's engagement could suffer, and that could negatively affect the company's revenue. 

But how likely is this scenario? Not very likely, in my view. After all, despite its past struggles, Facebook continues to post strong user engagement and even stronger financial results. During the third quarter, Facebook's daily active users (DAUs) was 1.62 billion, a 9% increase year over year. Further, the company's monthly active users (MAUs) and total revenue grew by 8% and 29% year over year, respectively. Finally, even if Facebook does encounter some headwinds as a result of this controversy, these will likely be short-term problems (Facebook has survived worse), and the company's long-term prospects will remain intact. For those reasons, Facebook still looks like a growth stock worth buying. 

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.

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