It's been a tough month for Facebook (META 5.37%). As of this writing, shares are down 12% on a one-month basis, wiping approximately $50 billion of market capitalization off the board. Revelations that the company had lax data oversight, allowing strategic communications firm Cambridge Analytica to obtain data from more than 50 million users, have dragged down the stock and the greater technology sector.
Although the situation seems disturbing, it's likely to not affect Facebook in the long run. The biggest risk to Facebook is short-term headline risk. Advertisers will continue to shift spend from other advertising outlets, like television and print, to digital, pointing to a long-tail runway for growth for Facebook.
eMarketer shows Facebook will grow in importance to advertisers
According to the marketing-focused data analytics firm eMarketer, digital marketing's largest competing outlet -- television -- is the recipient of less marketing spend. Last year was the first since 2009 that spend on U.S television advertising fell on a year-over-year basis, falling 1.5% from 2016's outlay.
The key difference is that the economy expanded 2.3% in 2017 versus the 2.8% drop in 2009 and the shift in spending was due to an increase in digital advertising. Look for less spending on television as a shift to digital advertising continues. According to eMarketer, TV advertising dollars will continue to shrink, with forecasts for negative year-over-year growth for three of the next four years.
The biggest beneficiaries of a shift to digital advertising are Facebook, which is expected to take 23% of all digital spending, and Alphabet, which is expected to have a 43% market share. Advertisers will continue to shift from television spending to digital and into the pockets of Facebook and Alphabet, regardless of short-term headlines.
Ignore talk about possible regulation, but focus on stakeholder management
More recently, concerns about possible regulation have dragged down the stock, perhaps irrationally so. It's unlikely the current political regime in the United States will reverse from its deregulatory focus. While European regulation is possible, Facebook should be able to adjust without a significant disruption to its business model.
More importantly, however, are the conditions that have called for further regulation. Facebook has mismanaged many stakeholder relationships, including:
- Users, which are using the site less often due to concerns about its effects on mental health.
- Advertisers like Procter and Gamble, which are increasingly worried about wasteful ad spend in digital marketing.
- Major content providers like journalists, which blame the service for decimating news outlet's digital advertising revenue.
The company has the lofty goal to connect the world. This is admirable, but the basics need to be solidified to better balance stakeholder concerns. It's time for Facebook CEO Mark Zuckerberg to forcefully pivot to stakeholder management or to step away from day-to-day operations and find an outside CEO.
I feel Facebook will be able to overcome this short-term headline risk and its investors will continue to benefit from the shift to digital marketing, but it's time for management to pay further attention to key stakeholders.