Facebook analysts positive despite recent catastrophes

Facebook CEO Mark Zuckerberg.AP

• Facebook has had at least five catastrophes this quarter, but Wall Street analysts are surprisingly upbeat ahead of the company’s third-quarter earnings on Tuesday.
• The ad giant has disclosed the biggest data breach in its history, landed the maximum fine from the UK’s data regulator, and seen Instagram’s cofounders leave the business.
• Wall Street analysts pointed to the fact Instagram is hugely popular with users and advertisers, and that many Facebook users feel locked into the social network.
• But one analyst said Facebook will have to up its operational expenditure to fix all its problems.

Wall Street is pretty upbeat about Facebook ahead of the tech giant’s third-quarter earnings on Tuesday.

Buy-side analysts maintained optimistic target prices for Facebook shares, pointing to the fact that users are locked into the world’s biggest network, the growing popularity of Instagram, and monetisation of messaging services WhatsApp and Facebook Messenger.

“We expect Facebook’s revenue growth to remain robust, supported by multiple growth drivers,” Wedbush analysts wrote on Friday. “The company’s unmatched scale and ease of use when it comes to its advertising platform suggest that Facebook will continue to represent a core part of digital advertiser budgets.”

RBC Capital Markets analysts wrote in an investor note on Sunday: “Facebook still has many growth levers left to pull, not least of which is video advertising.”

Facebook has suffered several calamities this quarter, including disclosing the biggest data breach in its history, quietly revealing that Russian companies had scraped people’s data, a lawsuit over its inflated video ad metrics, the founders of Instagram quitting, and landing a major fine from the UK’s data regulator.

A further consequence of Facebook’s data breach, which allowed hackers got hold of user “access tokens” to gain entry to entire accounts, is a massive fine. Now that Europe’s strict GDPR privacy laws are in place, Facebook could be fined up to $1.6 billion for the breach.

Wall Street is more concerned about daily users than fines

The downside of Europe’s new privacy laws and Facebook’s privacy breach in September is a slowdown in usage, according to multiple analysts.

Analysts for Stifel wrote earlier this month that they expected daily active user numbers to stay flat thanks to GDPR’s privacy opt-ins for Facebook. “A faster-than-expected recovery or growth in Europe [daily users] in 3Q would be a positive surprise in our view,” they wrote.

Deutsche Bank analysts suggested that Facebook’s decision to forcibly log some users out after its data breach might also impact daily usage.

Instagram is the golden child, even after its founders left

Young people love Instagram.Pabak Sarkar via Flickr

Instagram’s founders, Kevin Systrom and Mike Krieger, may have walked out of Facebook under a cloud, but the product they left behind is Facebook’s best shot at future growth.

Baird’s analysts noted a slight slowdown in ad spending growth on Facebook’s core app, but wrote that “Instagram remains strong.”

A fall Piper Jaffray survey found that Instagram had overtaken Snapchat as the most popular app among US teens.

And Deutsche Bank reported “positive feedback” on Instagram Stories as a format for advertisers, even though it’s still comparatively unproven in terms of return on investment.

Even when advertisers slow down spend on Facebook and users switch away from the social network, Instagram remains massively popular with both consumers and businesses.

Facebook may have to spend a lot of money fixing its issues

One note of caution came from analysts at Pivotal, which maintains a sell rating and laid out the multiple issues disclosed by Facebook this quarter.

They said Facebook was slow to acknowledge its problems and would likely need to up its spend to tackle issues like fake news and reliability of ad metrics. The Information reported earlier this month that Facebook was looking to buy a big cybersecurity company, apparently in an effort to fix its reputation after its data breach.

Pivotal analysts wrote: “[As] with the myriad of other problems which have come to light over the past two years, we continue to see these issues as representative of systemic problems impacting the company.

“[The] underlying problem that we see is that the company has been so focused on growth at any cost that it has failed to sufficiently invest in processes that might anticipate problems, acknowledge problems fast enough or fix problems fast enough.”

They added: “We’re not doubting they can’t be fixed, but the fact that problems keep emerging reinforces our view that the company is not as in control of its business as it needs to be. As problems are fixed, costs will rise, possibly faster than the company has anticipated (if only because the company is slow to acknowledge problems requiring fixing).”