How Can The Controversies Surrounding Facebook Impact The Company’s Valuation?
Facebook (NASDAQ:FB) has faced a number of controversies in the past few years, from misuse of the company’s platform (including fake news/propaganda, bullying and trolling) to its questionable data and privacy practices. This has led to regulatory issues, as well as increased scrutiny from lawmakers and some significant fines. In this note, using Trefis analysis, we look at the ways these issues could impact the company’s results and valuation.
In response to these controversies, Facebook has been working on enhancing its systems to help better protect users’ data and privacy. While user additions and access to user information are the key drivers of Facebook’s business, we believe that in the near term, the company may spend significantly to allay concerns of its alleged disregard for user privacy.
The company is expected to strengthen its platform to limit spurious access to user data, which could potentially lead to lower advertiser engagement and consequently lower ad pricing (and ARPU).
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Furthermore, an increase in R&D investments towards strengthening the platform is also likely to impact the company’s EPS.
The cumulative impact of this likely revenue pressure and additional costs could potentially dampen the company’s valuation.
The implied price of $130 with these additional costs and revenue pressure is almost 20% lower than our fundamental price estimate of $169 for Facebook. We believe the rally in Facebook’s stock since its December lows point towards the broader investor community calibrating the possible loss of value due to privacy concerns. Our interactive dashboard on the Impact Of Privacy Concerns On Facebook’s Stock Price outlines our estimates for the impact to Facebook’s results and value. You can modify any of the key drivers to visualize the impact of changes, and see all Trefis technology company data here.
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