Will new rules on toxic content hurt social media stocks?

Posted: 7 February 2022 9:21 am
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Proposed UK rules would change how big firms, including Facebook, respond. Does the bill signal trouble ahead for investors?

Concerns about the impact of harmful content on social media are global. The UK may lead the way to regulation.
The UK government has proposed new rules to tackle the spread of harmful and illegal content on social media sites, including Facebook, Instagram, YouTube, Twitter and TikTok. If the proposed online safety bill passes, social networks could be fined 10% of their global turnover if they fail to remove harmful content.
That’s a hefty fine, and other countries might be tempted to enact similar laws.
With many investors already concerned about potential regulation in this arena, what does a bill like this mean for Meta Platforms’ (FB) stock price and stocks of similar companies?

How could this impact big tech stocks?

The UK government’s proposed bill includes provisions outlawing content that features revenge porn, or deals in drugs or weapons, or promotes suicide, among other offenses.
While the emphasis has previously been on swiftly removing such content once it’s been reported, the change in the law would mean that social media companies would need to prevent it from being published.
And it is the ramifications if they fail to do so which could have an impact on their performance. It would leave them open to fines of up to 10% of their global annual revenues — or potentially being blocked altogether sites that are non-compliant.
While many site users will welcome the proposed curbs, investor confidence is likely to be shaken by the potential exposure to fines or operations temporarily ceasing if social media sites can’t put measures in place to effectively tackle this type of activity. And with the UK blazing the trail, other countries could also soon follow suit.

What does this mean for investors?

Meta Platforms’ (FB) share price took a significant hit last week, falling by 26% over two days and wiping close to $230 billion off its value.
Disappointing results were definitely a factor, but Facebook’s attitude towards good governance has also made investors nervous. The impact of the regulatory net closing, combined with a drop in new users, could hit the company’s growth prospects.
This could be a problem for mutual funds and ETFs that have bought into Meta’s stock performance. Even if you don’t own social media stocks or funds directly, owning a Nasdaq Composite or S&P 500 fund means you’re invested in Meta and could feel a knock-on effect.
Having a diversified portfolio can help reduce risk. Big tech stocks have been on the rise in recent years. But an inflationary environment, increased regulation and weaker future earnings suggest tricky times ahead for FAANG stocks, that group of market giants that includes the former Facebook.

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