Privacy Issues Driving Tech Stock Revenues

 |  Includes: CSCO, FB, GOOG, MSFT
by: IncomeHunter

With Internet security issues being highlighted by the mainstream media, the question for shareholders is "if" and "how" these privacy issues affect company's bottom lines. Cisco Systems (NASDAQ:CSCO) has recently faced some backlash from customers, a concern for sure. Netflix (NASDAQ:NFLX) has already had to pay a fine over privacy violations, a hit which will not help its revenue nor help it continue to set viewer records. Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) face growing concern that they simply know and record too much about their users, a problem that could plague bottom lines in quarters to come. On the other end of things, Microsoft (NASDAQ:MSFT) is making progress to quell privacy concerns, and I think this will help the company establish an image as a non-intrusive company and help it progress in the tech industry.

Cisco is only the most recent tech giant to "come under fire" for problems that are related to privacy issues. Essentially Cisco has been accused of forcing a cloud system on its users that in many ways infringes their privacy. For example, users have complained that Cisco is using the system to access their personal information. In addition, it seems as though the system bans them from surfing various sites and making illegal downloads, and many people see this as an infringement of personal rights. But Cisco's shares seem largely unaffected by the news, and have in fact risen about 0.2% in the last week. Cisco is only trading at about $19 per share, and I think that, despite profit margins rising in the last four quarters, if Cisco can't straighten out privacy fears, its customer base could slip.

Netflix was recently required to pay a fine for consumer privacy violations, namely for keeping information about videos watched and credit card details in order to engage in targeted marketing without the consent of users. The class act litigation fine which recently received preliminary approval from a judge will cost the video company in the region of $9 million. The $9 million fine should not give Netflix a huge hit, considering its last quarter gross profit was near $250 million. Still Netflix' costs are up, and though revenue has been rising thanks to increases in its customer base, its profits are shrinking from its 2011 numbers. Of course, Netflix 2011 numbers may be an unrealistic expectation, considering it traded for almost $300 per share.

Facebook users may be starting to wonder whether or not it is time to give up on the social network giant. This is a direct result of the privacy issues that the company has faced. Most users of Facebook are simply not aware of the privacy options that they have on their accounts or that the information that they post can be seen by people other than their friends and family. Although there are ways to use Facebook safely, many users may drop the system out of fear. These issues are nothing new for Facebook, but the mounting concerns could turn out to be a real problem. We know Facebook's numbers are down, as it works to prove its advertising model can be hugely profitable. Still its profit margins are slipping down lower than 25%, and analysts are estimating that Facebook's profits will come in much lower than the industry in general. This does not present a good picture for Facebook and I'd stay away for now.

The problem with Google is that is makes it easy for anyone to access any of your intimation that may be on the internet, and this is something that certain companies are starting to use to their advantage (or to their disadvantage if they don't get away with it). It seems that British Airways, for example, wants to start Googling passengers, raising many concerns about privacy. On the day that the news was announced Google stock dropped, possibly indicating that, to a certain degree people, may blame Google for this open access to their information. Don't tread on this hint lightly, it's a situation that may blow up in the big company's face in the months to come. Still, analysts are predicting healthy growth for Google, with estimates for quarterly revenue over $8.4 billion (over 20% growth from last year). If it can still offer an EPS anywhere near the 32.99 it offers now, Google will remain in the eyes of investors trying to get a piece of the giant. Eventually, though, it will face rising costs to keep user privacy concerns at bay, and we will have to see how badly that drags down profit margins.

Recently, Microsoft released the names of "two alleged members of the Zeus botnet crime ring, which used an estimated 13 million computers infected with the malware to steal more than $100 million" which shows us that it is a company making headway in keeping us safe. However, not everyone sees it this way as there was a drop in the stock price of more than 1% when the news was announced. I would not go so far as to say Microsoft's privacy protection move had an impact on that drop. I'm impressed that Microsoft is taking steps in this regard, as it could really come to protect its brand if something comes along and causes panic. Analysts are predicting some drops in revenue for Microsoft's coming quarters, though if Windows 8 and other products sell well it will be flying above the industry's growth average. Still those analysts have a median revenue estimate of $18.1 billion, which is still up a billion dollars from last year.

The industry is growing, there's no doubt about that. It'd be hard to advise against any of these giants. Though privacy scares can be strong enough to take down a business, don't ignore that. Microsoft seems to be making the most headway here and it remains my biggest buy recommendation for now, for reasons beside the privacy fears. However, imagine a scenario where privacy becomes a global issue (and it will come fast), Microsoft's progress could really pay off.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.