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Facebook's Actual Customers Aren't Going Anywhere

By Evan Niu, CFA – Apr 12, 2018 at 9:31PM

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Advertisers aren't too concerned about the ongoing privacy scandal.

Social networking juggernaut Facebook (META -0.93%) may be neck-deep in a massive privacy scandal at the moment, which is forcing the company and its users to confront some very difficult questions, but there are signs that the company's long-term fundamentals may remain intact. There have been at least two surveys conducted by Street analysts (one by Deutsche Bank and another by Jefferies) that suggest Facebook users are mostly sticking to the service, despite valid concerns regarding their privacy. There is no meaningful user exodus to speak of, at least not yet.

There's another critical group that isn't being fazed: advertisers.

Person using Facebook app on phone while walking

Image source: Facebook.

Ad revenue will be fine

Remember that advertisers are Facebook's actual customers, not users. Users are the product. Barclays analyst Ross Sandler has put out a research note (via Business Insider) that says advertisers remain committed to the platform. While negative headlines regarding Facebook continue to pop up every day, advertisers aren't focused on the public scrutiny. Rather, they're more concerned with their return on investment (ROI) from Facebook ads. These are business decisions, after all. Advertisers "continue to spend at a very healthy clip," Sandler writes.

In fact, the analyst currently expects ad revenue growth in the first quarter to have exceeded his estimate of 40% (excluding foreign exchange impacts). Sandler does not believe the controversy will have any material impact on the company's top line. The irony with the entire situation is that it only shows how effective Facebook ads are, which will reinforce ad spending. The note largely echoes official statements from Facebook. The company does not expect revenue to be impacted much, according to Facebook advertising exec Carolyn Everson.

The real financial impact will be on costs

That's not to say there won't be any adverse financial implication. Facebook has committed to investing heavily in beefing up its safety and security team. The company said last year in Congressional testimony (not Mark Zuckerberg's grilling this week) that it would double the size of that team by adding approximately 10,000 people. The additions would include full-time employees as well as contractors.

Facebook clearly needs to improve its privacy controls and will incur substantial costs in doing so, but those costs will be worth it in the long run as they are necessary for the company to rebuild user trust that has been eroded in recent years. Investors should expect those costs to be a drag on operating margins going forward.

Facebook is set to report first-quarter earnings on April 25.

Evan Niu, CFA, owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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