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RBC analyst: Only 2 scenarios would spur investors to flee Facebook

JP Mangalindan
Chief Tech Correspondent
Despite a spate of critical reports around Russian-linked ads on Facebook, Facebook’s revenues and stock isn’t likely to take a significant hit, contends RBC Capital Markets Managing Director Mark Mahaney.

Facebook has received serious blowback over revelations that Russia used the social network to meddle with last year’s U.S. presidential election. But don’t expect that criticism to impact the company’s financials or stock price, says one analyst.

Mark Mahaney, managing director at RBC Capital Markets, contends Facebook’s stellar financial run, which includes 16 consecutive quarters of mid-double-digit revenue growth, will continue. He also maintains an “Outperform” rating on Facebook (FB) stock and predicts the social network will generate $39.9 billion in 2017 revenues, largely from advertising — an estimate that remains unchanged in light of Facebook being in the news.

Indeed, there are only two hypothetical scenarios Mahaney says could cause advertisers to flee Facebook in droves: if someone at Facebook colluded with Russia to sway last year’s election, or if there were a massive Equifax-like breach that somehow affected users and undermined their trust in the social network.

Obviously, those are simply hypothetical scenarios. In reality, Facebook acknowledged earlier this week that an estimated 10 million users of the social network saw ads purchased by a Russian company to influence U.S. politics. On Monday, the social network handed over 3,000 of those ads to Congressional investigators.

While a Facebook spokesperson told TechCrunch those ads appeared to exploit racial and social divisions, as well as ugly stereotypes, Mahaney suggested the impact those ads had on the presidential election serves as a stark reminder to advertisers of Facebook’s sway as the third-most trafficked website in the world, according to web traffic site Alexa.  

What about investors?

Likewise, investors aren’t likely to panic and punish Facebook’s stock, according to Mahaney. The stock has climbed nearly 37% so year-to-date, but dipped 4.5% last week, possibly due to reports indicating Facebook CEO Mark Zuckerberg would sell up to 75 million shares of company stock over the next 18 months, as well as a Washington Post exposé alleging Zuckerberg brushed aside warnings from President Barack Obama about fake news two months before President Donald Trump’s inauguration. This week, Facebook stocked dipped less than 1%, amid news that the social network was turning over Russia-linked ads to Congressional investigators.

“High-level investors don’t really like those kind of headlines,” Mahaney says, referring to the flurry of stories floating around the internet somehow associating Facebook with Russia. “But you know, again, I think most investors would look at this and say, ‘Wow, this has got to be a pretty powerful platform if it could influence an election.’”

Over the longer term, the Federal Election Commision may attempt to rein in some of Facebook’s power by making regulatory changes. The FEC, for instance, could reverse a 2006 rule that currently leaves most political activity on the internet unchecked. Facebook could also face mandates similar to those imposed on TV stations, requiring the social network to store digital copies of ads in a database, as well as information like how much the ad cost, the ad’s targeted demographics, and when it ran.

Facebook’s self-regulation efforts

Facebook, for its part, has made several attempts at self-regulation in recent weeks. This September, the social network rolled out new standards and guidelines for content that can be monetized and also said it would block ads targeting users based on derogatory terms. And just this week, Facebook said it would hire 1,000 more people for its global ads review team over the next 12 months. Moving forward, the social network will also allow anyone to view any ad run by any organization on Facebook instead of merely the ads targeting them.

Scott Galloway, a professor of marketing at NYU Stern School of Business and author of the book, The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google,” posited that it will be European leaders who lead the way on tech regulation rather than the U.S. He pointed to European Commissioner Margrethe Vestager, who fined Google (GOOG, GOOGL) in June a record 2.42 billion-euro, or $2.72 billion U.S. dollars, for breaching EU antitrust rules by directing customers to its own online shopping business in online searches.

“The current U.S. administration does not have the IQ nor the will to go after big Tech,” contended Galloway.

Scathing as Galloway’s comments seem, he also could be right about the increased EU regulations. As big tech companies learn the hard way, the kind of influence that can not only sway pivotal moments in history like, say, a presidential election, can also get you into trouble.  

JP Mangalindan is a senior correspondent for Yahoo Finance covering the intersection of tech and business. Email story tips and musings to jpm@oath.com. Follow him on Twitter or Facebook.  

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