While all eyes will be on Facebook Inc. (NASDAQ:FB) CEO Mark Zuckerberg this week as he faces a grilling before Congress, Wall Street is looking past the Cambridge Analytica scandal and telling clients all will be well with FB stock.
How should FB stock investors react? They might want to hold tight until April 25, when the company is next due to report earnings. That will give them the first chance to see the impact of the scandal that broke last month. Estimates are Facebook will earn $1.37 per share on revenue of $11.18 billion.
Bulls will trumpet good numbers and statements Facebook makes about traffic, based on metrics like average monthly users. But it’s the volume of traffic Facebook, Instagram and Messenger generate that should concern investors, not the user count.
Will people keep filling Facebook’s cloud? That is the question.
As I wrote back on March 1, Facebook is uniquely vulnerable among the “cloud czars” — Apple Inc. (NASDAQ:AAPL), Microsoft Corp. (NASDAQ:MSFT), Amazon.Com Inc. (NASDAQ:AMZN) and Alphabet Inc. (NASDAQ:GOOGL) are the others.
These companies, together, represent 70% of capex spending in the “hyperscale” or cloud capital market, with Facebook’s spending increases close to those of market-leader Amazon.
But only Facebook is completely dependent on advertising to fill its financial coffers. It doesn’t re-sell computing capacity, it’s not a hardware or software company. Google is selling search and then gets out of the way. Facebook is a media company, although it refuses to admit to it, and it’s this refusal that is at the heart of its problem. Cutting off advertisers from some data collections is not the problem. Collecting the data is the problem, even though without the data collection there’s no business.
As Apple co-founder Steve Wozniak noted recently, while closing his own Facebook page, with Facebook “you are the product.” How much time you spend on Facebook, and how much credibility you give what you read there, matters more to Facebook than to any other cloud czar. Without time and credibility it has nothing to sell advertisers.
The Cambridge Analytica scandal was the “perfect storm” for the company. We’ll get a clue as to how bad it was when earnings come out, but only a clue. The true story is being written right now, in the daily habits of nearly 2 billion people.
Why Worry About FB Stock?
With FB stock now down about 15% from its highs, analysts are insisting its current price is just 18 times their own 2019 estimates for earnings of $9 per share.
This assumes Facebook can keep growing its average revenue per user, which was $26.75 last year, up 35% from 2016, and that Instagram will pick up any users lost by the main service.
Analysts are also due to praise Zuckerberg’s Congressional testimony. Apologies are easy to give. So are promises about past data sharing.
What may not be easy to deliver, profitably, is growth alongside global adherence to Europe’s General Data Protection Regulation, which goes into effect May 25. Zuckerberg has also expressed approval of the Honest Ads Act, requiring more disclosure on political ads.
Problem is, the use (or abuse) of Facebook by political forces supporting Brexit, Trump and the aims of Russia weren’t built around advertising. Cambridge, and its allies, used the data profiles they collected to push editorial into user newsfeeds, not to buy ads.
Ultimately, it’s the Facebook business model, drawing traffic around expressed interests, that is the problem. Facebook can make anyone famous, even a murderer, and so long as this fame is the game, so long as Facebook is a media company that pretends it’s just a network, the scope of this scandal is only going to grow, as will the threat to the business model that fills its cloud.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and MSFT.