Facebook’s First Quarter Results And The Cambridge Analytica Scandal

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I was recently asked by a marketing news website [a]List to contribute to an article about the Cambridge Analytica and Facebook scandal.

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Q1 hedge fund letters, conference, scoops etc

And the question they wanted answered asked was: What impact financially will the scandal have on Facebook’s first Quarter financial results? And what are the key financial metrics a marketer should look out for?

Here was my response.

I believe the Cambridge Analytica issue will have a small effect on Facebook’s revenues, and ultimately per share earnings then people imagine. If anything, it will only slow the pace of revenue growth temporary and it will not affect Facebook structurally.

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The biggest risk that I’m would worry about is Mark Zuckerberg explaining, before a joint meeting of the Senate Commerce and Judiciary committees, that Facebook is more of a publisher than a tech platform, when asked about it by a Senator.

Which means that Facebook is responsible for all content published on Facebook by its users. This may open a floodgate of litigation claims against Facebook. Mark did, in a later session, back track quickly about Facebook being a publisher, saying it’s actually a tech platform. Which you can bet Facebook’s lawyers helped him change his mind.

(PBS News Hour).

The two important financial key indicators for marketers and investors is: growth in net earnings per share and free cash flow.

Check out Facebook’s mouth watering growth:

  • The average growth in Free Cash flow in all four quarters for 2017 was 51%, and growth in Q1 2018 was 33% compared to 61% growth in Q1 2017.
  • The average growth in diluted net earnings per share for all four quarters of 2017 was 60%. And growth in Q1 was 63% compared to 73% in 2017.

It is important to compare free cash flow and net earnings because if earnings grow, but free cash flow stagnates or declines, it is likely the books are being cooked, think Enron in the early 2000s.

The large growth in both free cash flow and net earnings will slowly deteriorate due to fierce competition between Google (the largest player) and smaller players.

Facebook should still be an attractive place for marketers as they have insights to users other companies only dream about, and the Cambridge Analytica scandal will not hurt the long-term prospects of Facebook for both investors and marketers.

Yours in Investing,

– Adam

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