Tomorrow Zuckerberg and Facebook take another step forward post Cambridge as the company plans to meet with the EU Parliament and its Conference of Presidents in Brussels to discuss in detail the Cambridge situation and a myriad of other privacy issues going forward. With GDPR set to kick in later this week, the timing of Zuckerberg appearing in front of the EU will be critical as Facebook continues to navigate the choppy waters post Cambridge, which thus far appear to be very containable in terms of negatively impacting user engagement on the platform and advertising related softness. With Zuckerberg passing his grilling in the Beltway with flying colors last month in our opinion, this time around with the EU we expect a much tougher line of questioning and a heavy focus on privacy related issues which are at center stage with Cambridge exposing a host of privacy/data content issues related to the Facebook platform. With GDPR around the corner (May 25), we expect a major focus during the hearings on complying with this game changing data privacy regulation and steps Facebook is taking going forward to guard against another Cambridge like situation and detailing its data content guardrails moving ahead. The Street has stepped away from the edge of the cliff over the last month on Facebook as the combination of stronger than expected March results, an impressive performance by Zuckerberg in DC, and the fears of regulation starting to fade in the background have been catalysts for a major rebound in shares.
In our recent GBH Tech Tracker user survey (which we will publish later this week) work over the past five weeks post Cambridge, we continue to find that 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. We estimate in a worst case scenario that between $1 billion to $2 billion of annual advertising (~3% of revenues) is potentially “at risk” in 2018 based on slower user growth, reduced engagement, and softer advertising revenues with regulation the major variable that is a concern for the Street looking further down the road. In a nutshell, so far the fundamental damage to the Facebook platform has been “very contained” in our opinion and is better than feared which is a relief for the Street, however this will be a long winding road with a defining few weeks and months that lies ahead for Facebook and Zuckerberg, with tomorrow’s hearing in Brussels kicking off another important chapter to help navigate the treacherous regulatory landscape over the next 12 to 18 months. Regulation remains the major X variable not just for Facebook, but its social media brethren Google, Twitter, Snapchat, as well as the rest of the ecosystem with slight regulatory oversight at this point the best case scenario, with more drastic and heavy handed regulation both within the Beltway and EU a clear bearish sign for the sector, which we continue to believe is a less likely scenario at this point. We maintain our Highly Attractive rating and $225 price target on Facebook.