Takeaway: A new round of bad news makes it even less likely that Google and Facebook will be able to meet investor expectations.

Call it the scandal that won’t die: Facebook's shares dropped 7% on Monday amid yet another controversy involving the 2016 elections and data privacy—wiping out $36 billion of market value in the process. The selloff continued on Tuesday before the stock rebounded slightly on Wednesday. (Monday's losses, however, still remain.) Investors have also sent Google stock down 3% this week, twice the decline of the overall S&P 500.

This time the catalyst was Cambridge Analytica, a heretofore-unknown data-mining and analysis firm that quietly collected the Facebook data of more than 50 million users, the vast majority of whom never consented to the scheme. (Well, they sort-of consented: They should have noticed the super-fine print on their agreement with Facebook, which allowed their personal info to be outed by 270,000 "friends" who signed in to "thisisyourdigitallife," a personality profile app designed by a shadowy Russian academic living in the U.K.) The firm then used this trove to build detailed psychographic profiles of Facebook users that allegedly became an important cog in the Trump campaign’s voter-targeting strategy.

Facebook tried (in vain) to ensure that the scandal never made the front page. Back in August 2016, it sent a cease-and-desist letter to Cambridge Analytica, ordering the firm to delete all its accrued data. But now it appears that Cambridge Analytica did not comply with this mandate and kept the data long after it assured Facebook that it had been deleted. News of this deception is what sent Facebook shares tumbling.

And yes, in case you're asking, it does matter that this massive data steal was used by Robert and Rebekah Mercer (Cambridge Analytica's principal funders) to help get Trump elected, rather than help market, say, applesauce. Older Democrats were already furious about Facebook's role in Russia's interference in the 2016 election. And younger Democrats were already backing an EU-style full-court press against the FAANGs on antitrust grounds. And now this?

Memo to Mark: You better start worrying when the populist firebrands on both the right and the left—red zone and blue zone—really don't like you very much. Oh, btw, your odds of winning the Democratic primary in 2020 are now on par with those of WWF celebrity extraordinaire, Dwayne Johnson.

The scandal has touched off a broader existential panic about the sanctity of personal information in the digital age. How is my data being used, and by whom? How are companies like Facebook protecting my information from getting into the wrong hands? It has also raised the specter of stricter government oversight of the companies that amass and store this information: Republican and Democratic lawmakers alike are calling for tech CEOs to appear before Congress to explain their data-storage and security procedures. U.K. and EU authorities are also launching (yet one more) investigation of Facebook.

This is a much-dreaded development for Facebook and Google, one which in fact featured prominently in our recent analysis of the two firms. (See: “Danger Ahead for Google and Facebook?”) As we pointed out in our analysis: "Throughout history, nearly every society has taken a strong collective (and regulatory) interest in how its members disseminate news and information and how they communicate with each other. Even more so when information technology is changing rapidly; when the technology is dominated by one or two very large private agents that seem unresponsive to ordinary market forces; and when populism is on the rise."

The deluded premise behind cryptocurrency—that the public can afford to be ignorant of, and take no interest in, how money changes hands—is duplicated here by a tone-deaf Silicon-Valley corollary regarding how news and information changes hands. No, and no. In other words, even if Google and Facebook pose no threat to market competition on purely economic grounds (though many economists believe they do), they are still vulnerable to extensive public regulation due to the socially sensitive nature of the commodity—what you know about the world and what the world knows about you—that they buy and sell.

Sooner or later, Facebook and Google will have to give public regulators a seat at the table. Which, of course, is bad news for bulls expecting these companies to grow their revenue, unencumbered and unchallenged, for years on end.

The Cambridge Analytica scandal and its aftermath isn’t the only bad news weighing down Facebook. There has been another, arguably more important development that has been little covered by the financial media.

Before we mention it, we must revisit the core argument of our Google-Facebook piece. We made the case that, in order for the two companies to be worth their current price, investors must be expecting one, two, or even all three of the following dynamics to take place:

  1. Google and Facebook will continue to squeeze out all of their digital competitors.
  2. Digital ad spending will continue to rise rapidly as a share of total ad spending.
  3. Total ad spending will grow as a share of GDP.

Out of these three dynamics, we conceded that the first—Google and Facebook continuing to grow their digital market share—was pretty much a given. It was the other two dynamics that raised our biggest red flags. Namely, we argued that it is highly unlikely that digital will kill off most other forms of advertising in the next few years. And we argued that ad spending is unlikely to rise much (if any) as a share of GDP.

Well, here comes the cold water: Just-released projections by eMarketer, a trusted digital marketing firm, show that the Google-Facebook share of digital advertising will actually shrink in 2018 and 2019.

It’s hard to overstate just how damaging these new projections are to anyone betting on Google and Facebook. It would have been tough enough for these companies to justify the bulls’ optimism even with a modestly growing market share. It will be utterly impossible for them to do so with a shrinking market share.

That’s not all there is to dislike about Google and Facebook, either. These companies are currently taking a PR beating from consumers and advocates who blame addictive technology for making us less happy, less social, less imaginative, less productive, and more suicidal—a theme we covered at length in a separate piece. (See: “Tech-Lash Batters Silicon Valley.”) They are also doing a dangerous dance with ad-funded content creators like newspapers, magazines, and bloggers: On the one hand, they rely on their content to keep their users interested; on the other, they are sucking away all their ad revenue. Google just announced a $300 million initiative to aid the very news organizations that it is destroying, a fantastic gesture tantamount to giving a blood transfusion to a victim you have just run through with a sword. When it comes to premium content, Google is a parasite. And not all parasites wake up in time to realize that they have to keep their host alive.

The bottom line? Many investors will jump at the opportunity to buy these stocks at a “discount.” In the wake of the Cambridge Analytica scandal, plenty of media outlets are telling readers to buy the Facebook dip. We maintain that the dip is a foretaste of more to come as users, voters, and political leaders reassess how these firms make their money. Google and Facebook remain a perilous play.