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

facebook ceo mark zuckerberg

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

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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