Facebook Can Weather the Data Scandal, say Analysts

Social media giant can prosper even after the Cambridge Analytica scandal and rebuild user trust, say Morningstar equity analysts

Ali Mogharabi 23 April, 2018 | 1:25PM
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Facebook Revenue Per User


Morningstar equity analysts view the recent downturn in Facebook's stock, driven by the Cambridge Analytica data scandal, as a buying opportunity for investors. We think the firm is likely to endure the short-term impact of the scandal, and we do not expect a significant long-term headwind to Facebook's platform, operations, or sources of competitive advantage. We believe that a good portion of any potential downside is priced into the shares, and we stand by our $198 fair value estimate - against a current share price around $168.

We think Facebook, which releases Q1 earnings this week, 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. 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. And we believe future regulations stemming from the latest data breach are likely to strengthen barriers to entry in this space, helping Facebook maintain its attractiveness to advertisers compared with other social networks like Twitter or Snap. 

The concern for investors should not be about the data lost yesterday, but the data that might not be captured tomorrow. We believe the market is concerned that the Cambridge Analytica scandal has raised awareness among some users that Facebook does in fact collect user data. In turn, users may become more concerned about privacy. Such customers may choose to delete Facebook altogether or use Facebook less often than in the past.

Also, even if users or usage were to remain steady rather than decline, it is possible that Facebook might be able to retain less data than in the past. All of these issues may make the Facebook platform less attractive to advertisers, as it may lead to less effective targeted ads. In turn, Facebook may face headwinds to user and/or revenue growth. Similarly, the positive cycle of the firm's network effect may start to slow, if not unwind.  

Despite this ugly scenario, we do not expect significant user loss for Facebook for a few reasons. First and foremost, we don't see many Facebook alternatives on the market today or emerging to take the throne. Facebook remains the dominant social network platform, with its two main competitors, Twitter and Snap, continuing to have difficulty gaining traction in terms of user count and effectively monetising their users. 

Second, perhaps the most attractive alternative to Facebook is Instagram, owned by Facebook. Instagram currently has 800 million users and is growing faster than not only rivals such as Twitter or Snap but also the Facebook platform itself.

Third, as we have seen for nearly 10 years, while Facebook has faced various data issues, its monthly average user count has grown from 100 million to 2.1 billion by the end of 2017. While past performance is not a predictor of future success, prior data issues had little effect on the firm's exponential growth or the favourable network effect that Facebook has exhibited over the past decade.

We naturally see monthly average user growth decelerating over the next few years as the Facebook platform matures, but we think it is far too bearish a scenario to project overall user declines just yet.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Meta Platforms Inc Class A511.90 USD-2.15Rating

About Author

Ali Mogharabi  is an equity analyst for Morningstar

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