Facebook's rep has taken a hit from the Cambridge Analytica scandal — but its ad business hasn't (FB)

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Despite all the negative news lately, particularly relating to the Cambridge Analytica data leak, Facebook's advertising business appears to be plugging along, Baird analyst Colin Sebastian said in a research note Friday.
Ad spending on Facebook continues to grow rapidly, Sebastian reported, citing recent research from data firms.
While some companies with well-known brands may scale back their spending on Facebook, the impact is likely to be minimal, he said.

Facebook's stock and reputation were pummeled in the wake of the Cambridge Analytica scandal, but its actual business is likely doing just fine, thank you very much.

That's the take of Baird analyst Colin Sebastian after checking in with advertisers and reviewing some of the latest research on ad spending. Although the company faces some risk that usage of its service may decline thanks to the negative sentiment surrounding it, its advertising business appears to be largely unaffected by the scandal, Sebastian said in a research note issued Friday.

"Our checks suggest advertiser response to the negative headlines is relatively modest," he said, reiterating his "outperform" rating and $210 price target on Facebook's shares.

In recent trading on Friday, Facebook stock was off $1.46, or about 1%, to $166.64 a share.

The social media company has been surrounded by negative news for much of the last 18 months, since news broke that Russian-linked groups allegedly hijacked its service to spread propaganda to try to influence the 2016 election. But scrutiny of the company reached new heights last months after reports that Cambridge Analytica, a data research firm linked to Donald Trump's election campaign, illegitimately gained access to the personal data of potentially tens of millions of Facebook users via a Facebook app.

In response to the negative sentiments, some users have vowed to disconnect from the service. And in the fourth quarter, usage of the social network in the United States and Canada declined for the first-time ever.

Advertisers seem to be taking the negative news in stride, but Instagram could be a wildcard

But for the most part, advertisers so far seem to be ignoring the negative sentiments and declining usage data, Sebastian said. Advertising spending on Facebook's eponymous service grew 48% in the first quarter compared with the same period a year earlier, he noted, citing data from advertising research firm Merkle. That was in line with growth rates in the first through third quarter of last year and well above that posted in the fourth quarter, he said.

That data aligns with the reporting of Business Insider's Mike Shields, who found that a good chunk of Facebook's 6 million advertisers are not even thinking of cutting back spending on Facebook post Cambridge Analytica scandal.

One reason for the advertiser indifference is that many Facebook marketers are not big brands with a public image to uphold, but smaller, so-called "direct advertisers." Facebook advertising is a crucial channel for driving sales in their business, so they can't afford "to be precious," as one advertiser said.

Facebook's Instagram by contrast, is much more heavily skewed to big brand advertisers. And ad spending on Instagram during Q1 grew 62%, Sebastian said, again pointing to Merkle data. That's a significant slowdown from the 122% year-over-year growth the service posted in the fourth quarter (although the Q4 holiday period is seasonally strong).

More broadly, advertising spending on social networks grew 37% on an annual basis in the first quarter, Sebastian noted, citing data from digital marketing firm Kenshoo. That's down only marginally from the 39% rate social ad spending grew by in the fourth quarter, he said. Meanwhile, Kenshoo's data indicates advertisers didn't change the amount they were spending on Facebook in reaction to the Cambridge Analytica fiasco, he said.

"Digital ad trends appear stable," he said.

Baird's own checks with advertisers indicate that some companies with well-known brands and some small and mid-size business may cut back on their spending on Facebook. But the impact is likely to be minimal, Sebastian said, at least in the near future.

"We continue to recommend that investors with a longer-term time horizon add to positions opportunistically," he said.

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