Investors are dying to know if the Cambridge Analytica scandal means people use Facebook less

Investors are dying to know if the Cambridge Analytica scandal means people use Facebook less


facebook ceo mark zuckerberg
Facebook
CEO Mark Zuckerberg testified before the House Energy and
Commerce Committee on Capitol Hill on April
11.

Chip Somodevilla/Getty
Images


  • Analysts want to know whether the Cambridge Analytica
    scandal has affected user engagement on Facebook.
  • CEO Mark Zuckerberg has said the #DeleteFacebook
    campaign hasn’t had much impact, but it’s less clear whether
    users are choosing to spend less time on the social
    network.
  • Facebook was already suffering from falling user
    engagement, and it said months ago that it was making changes
    expected to reduce user time spent on the platform.

As Facebook grapples with the fallout of the Cambridge Analytica
scandal, there’s one big question on everyone’s lips: How are the
users reacting?

On Wednesday, we may get some answers. The social-networking
giant is due to report its earnings from the first quarter of
2017, which featured weeks of bruising headlines about how as
many as 87 million users’ data was improperly obtained by a
political research firm.

As the scandal erupted, a #DeleteFacebook campaign called on
people to leave the service, but its effect appears to have been
muted. When testifying to Congress,
and in interviews with journalists
, CEO Mark Zuckerberg said
Facebook had not seen a „meaningful number of people act on
that.” Plus, early estimates from analysts are
predicting that the crisis hasn’t damaged the company’s
advertising business
.

Less clear, however, is whether and to what extent the scandal
has affected the amount of time users spend on the social
network.

In a research note published Sunday, Stifel analysts wrote that
they did not expect „a material impact” to Facebook’s advertising
business, but they expressed concern about frequency of use.

Rating Facebook’s stock as „hold” and setting a price target of
$168, the analysts wrote: „Should recent negative engagement
trends in North America and Europe persist, we believe forward
engagement estimates could prove optimistic. Overall, we continue
to see heightened risk around regulation, consumer trust, and
consumer usage levels of the platform.”

In a research note published last week, Pivotal Research Group’s
Brian Wieser said a decline in use was not an „overly
controversial” expectation — but the magnitude was less certain.
„Most investors can acknowledge that consumption on core Facebook
is weak, and downside from the Cambridge Analytica episode will
probably occur, although the scale to which this occurs is
debatable,” he wrote.

„Our guess is that reduced trust in the platform paired with
increasing awareness of toxicity of the platform,” as well as
other factors, „could mean ongoing erosion of usage throughout
2018. We don’t think this point is overly controversial.”

‚We think Facebook can overcome the most recent data issue’

Some analysts are already trying to quantify the impact of any
changes in user behavior. GBH Insights surveyed users and found
more than one in 10 said they planned to reduce their amount of
time using the app.

„Roughly 15% of Facebook users polled will decrease in some
capacity their use of the platform in light of the Cambridge
issue and we estimate a negligible number of users have deleted
their Facebook accounts despite the backlash,” the GBH Insights
analysts wrote.

The firm estimates that slower user growth could put up to $2
billion of revenue at risk for the company but says „the
fundamental damage to the Facebook platform has been ‚contained’
in our opinion.”

Others are more bullish, predicting that Facebook’s portfolio of
apps, including Instagram and WhatsApp, will pick up any users
who ditch or cut back on Facebook.

„We think Facebook can overcome the most recent data issue, as
over time, we expect it to regain user trust around data security
and privacy. Thus, we don’t see users walking away from Facebook
properties or otherwise negating the firm’s network effect moat
source,” Morningstar Equity Research’s Ali Mogharabi wrote in a
note on April 20.

„Plus, Facebook owns the two largest (and perhaps most valuable)
social networking properties, and any migration of users or usage
away from Facebook may simply shift toward its Instagram
platform.”

RBC Capital Markets, meanwhile, expects any drop-off to be
short-lived: „We do believe there may be near-term pressure
(Q1/Q2) on User and Engagement growth @ Facebook, given all the
negative media attention on the data controversy, though do not
see a material long-term impact.”



pivotal research group


Data
from Pivotal Research Group showing a decline in time spent on
Facebook since late 2016.

Pivotal
Research Group


Complicating matters is the fact that Facebook engagement was
already in decline —
and on the company’s fourth-quarter 2017 earnings, executives
said
the company would be making changes expected to reduce
it further as the company prioritized „meaningful connections.”

„It’s always going to be very hard to connect Cambridge Analytica
to a specific outcome for Facebook if they’re already exhibiting
user decline, usage decline, and they already said in January
they’re going to design a platform to cause more declines,”
Pivotal’s Wieser said on a call.

„How are we going to isolate for it? I think it’s probably safe
to say relatively few people will completely abandon Facebook,
like truly deleting Facebook. But … people who are already
diminishing their use of the platform will continue to do so.”

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