Facebook retains Wall Street's faith despite Cambridge Analytica fallout

Investors assessing the damage to Facebook (FB) from the Cambridge Analytica flap are asking themselves a key question: Is this time different?

Wall Street has tended to look past Facebook's previous transgressions since it went public in 2012, focusing on the social networking company's swift growth and enormous profits. But the latest controversy has slammed Facebook shares, pushing them down 7 percent on Monday and taking a further toll on Tuesday. 

The episode comes at a critical time for Facebook. The company is trying to repair its image after several major missteps, including allowing ads linked to Russian interference in the 2016 U.S. election to be purchased and spread unchecked. 

Regulatory risks are rising

Facebook and Instagram platforms are used by more than 2 billion people worldwide. And advertising to those users is the company's cash cow: Ads made up 98 percent of its revenues in 2017.

A big part of making that money is Facebook's ability to strategically target those ads based on data from its users. Regulation that might limit access to certain information, for instance, may make those ads less effective. In turn, that could make the company's ad business less profitable if advertisers look elsewhere.

It's a risk the company has openly acknowledged. "Marketers will not continue to do business with us …if we do not deliver ads in an effective manner," Facebook wrote in its 2017 annual report.

Sweeping federal data privacy and security regulations governing the way internet giants like Facebook and Google operate could take years to develop and implement -- assuming the political will is there in the first place. More likely, in the short term, are government fines and other penalties if Facebook is found to have mishandled its members' information related to the Cambridge Analytica controversy. 

Under a 2011 settlement with Facebook, the Federal Trade Commission outlined specific standards for sharing its data, including requiring independent third parties to report on the company's privacy record every two years. If the agreement was violated, the agency could hit Facebook with civil penalty of up to $41,484 per violation per day. 

Given that Cambridge Analytica used data from 50 million Facebook users, that would amount to a financial hit of roughly $2 trillion. Height Capital Markets analyst Stefanie Miller thinks the FTC is unlikely to pursue such an exorbitant fine. 

"So the question is what will the FTC seek against [Facebook] in order to be satisfied with a smaller fine," she said in a note to clients.

But advertisers, Wall Street not jumping ship

While a tide of negative publicity for Facebook could eventually cause advertisers to re-think their use of the platform, for now they look to be in wait-and-see mode. 

"This specific incident is not likely to cause advertisers to leave Facebook, but it will cause them to think twice about how data about Facebook's users is handled," Debra Aho Williamson, an analyst at research firm eMarketer, said in an email to CBS MoneyWatch. For now, "We see no signs of advertiser demand diminishing. On the contrary, worldwide ad spending on Facebook is expected to rise more than 22 percent this year, reaching $48.85 billion."

That vast sum is one reason why many on Wall Street remain optimistic about the company's longer term outlook. 

"We would note that we do not believe past regulatory concerns have impacted Facebook user engagement or advertising, though we will continue to monitor the situation," analysts at Raymond James wrote in a research note. "[W]E believe shares are already discounting a lot of these concerns and remain our positive outlook on FB shares."

By contrast, to ensure data privacy Facebook may have to end its practice of making user information available to researchers, they add.

Credit Suisse analysts also expect Facebook's stock to bounce back. But congressional hearings into the Cambridge Analytica affair could add a degree of uncertainty around the shares, which until recently investors had seen as a sure bet.