Syz analyst still likes Facebook despite data breach scandal

Tech giant Facebook is at the center of the Cambridge Analytica scandal. Christopher Wylie, a co-founder of Cambridge Analytica, revealed to The Washington Post last week that the data of around 50 million Facebook users had been harvested by British company Cambridge Analytica and suggested that it had been used to help Donald Trump accessing the US presidency in November 2016.

Consequently, from 19 March to 23 March, Facebook’s stock value dropped to $159.39 from $176.83, at levels not seen since July 2017.

Though Shoaib Zafar, senior analyst at Geneva-based Syz Asset Management, remains positive on Facebook’s long-term prospects as major investments to improve the social network continue.

“There are a number of main concerns surrounding Facebook (FB) for the street. These include its apparent inability to fully comprehend the magnitude of the problem, fears of intensifying regulatory risk, potential sabotage of ad campaigns that use enhanced user data and the potential financial liabilities from this episode. These worries are justified.

“Significant political bashing has already begun from both sides of the Atlantic. While Mark Zuckerberg already announced in January that he is willing to work on fixing the imperfections in the system he created, we wonder how much control does FB really have over the data from its two billion users,” said Zafar.

Syz AM’s analyst questioned whether sovereign states and agencies such as the CIA bother respecting privacy policies when it comes to mining information on users under the pretext of national security. He underlined the question of Facebook being able or not to repair breaches in data protection remains unanswered.

“On the positive side, with FB’s deep pockets, the company is in good shape to carry out meaningful investments in areas where it needs to improve without hurting its operating or net incomes. Lower free-cash-flow generation in 2018 versus 2017 is already priced-in, and a business generating 86% gross margin and 57% EBITDA margin will most likely improve free-cash-generation in years following heavy investments.

Most importantly, Facebook’s brand equity is likely to stay intact, Zafar assessed.

“The company will continue to deepen its presence in emerging areas of AI, digital marketing, online auctioning and in-app payments, for example. In addition, any enhancements in the business model, particularly in the area of data security, will be quickly acknowledged by both its users and regulators. We stay invested in FB and continue to see its valuations as attractive – with the stock trading at 19x 2018e EPS and 16x 2019e EPS,” he argued.

ABOUT THE AUTHOR
Adrien Paredes-Vanheule
Adrien Paredes-Vanheule is deputy editor and French-Speaking Europe Correspondent for InvestmentEurope, covering France, Belgium, Geneva and Monaco. Prior to joining InvestmentEurope, he spent almost five years writing for various publications in Monaco, primarily as a criminal and financial court reporter. Before that, he worked for newspapers and radio stations in France, in particular in Lyon.

Read more from Adrien Paredes-Vanheule

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