Investors are dying to know if the Cambridge Analytica scandal means people use Facebook less

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Facebook co-founder, Chairman and CEO Mark Zuckerberg testifies before the House Energy and Commerce Committee in the Rayburn House Office Building on Capitol Hill April 11, 2018 in Washington, DC.

• Analysts want to know whether the Cambridge Analytica scandal has affected user engagement on Facebook.
• CEO Mark Zuckerberg has said the #DeleteFacebook campaign hasn't had much impact, but it's less clear whether users are choosing to spend less time on the social network.
• Facebook was already suffering from falling user engagement, and said months ago it was knowingly making changes that reduce user time spent on the platform.

As Facebook grapples with the fallout of the Cambridge Analytica scandal, there's one big question on everyone's lips: How are the users themselves reacting?

On Wednesday, we may get some answers. The social networking giant is due to report its earnings from the first quarter of 2017, after weeks of bruising headlines about how as many as 87 million users' data was harvested by a political research firm.

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As the scandal erupted, a campaign called on people to #DeleteFacebook in response, but its effect appears to have been muted. When testifying to Congress, and in interviews with journalists, Mark Zuckerberg downplayed its effects, saying Facebook has not seen a "meaningful number of people act on that." Plus, early estimates from analysts are predicting that the crisis hasn't damaged the company advertising business.

But what's less clear is if, and to what extent, the scandal has affected the amount of time users are choosing to spend on the social network.

In a research note published on Sunday, Stifel analysts wrote that they "do not expect a material impact to the company's ad business [...] from recent events." Still, Stifel remains concerned about usage levels.

Rating Facebook's stock as "hold" and setting a price target of $168, the analysts wrote: "Should recent negative engagement trends in North America and Europe persist, we believe forward engagement estimates could prove optimistic. Overall, we continue to see heightened risk around regulation, consumer trust, and consumer usage levels of the platform [...] we await further visibility on the above-mentioned risks."

In a research note published last week, Pivotal Research Group's Brian Wieser said a decline in usage is not an "overly controversial" expectation - but the magnitude is less certain. "Most investors can acknowledge that consumption on core Facebook is weak, and downside from the Cambridge Analytica episode will probably occur, although the scale to which this occurs is debatable," he wrote.

"Our guess is that reduced trust in the platform paired with increasing awareness of toxicity of the platform [and other factors] ... could mean ongoing erosion of usage throughout 2018. We don't think this point is overly controversial."

"We think Facebook can overcome the most recent data issue"

Some analysts are already trying to quantify the impact of potential user behaviour changes. GBH Insights surveyed users, and found more than a tenth of users said they planned to reduce the amount they use the app.

"Roughly 15% of Facebook users polled will decrease in some capacity their use of the platform in light of the Cambridge issue and we estimate a negligible number of users have deleted their Facebook accounts despite the backlash," its analysts wrote.

The firm estimates that up to $2 billion of revenue is at risk for the company due to slower user growth , but "the fundamental damage to the Facebook platform has been 'contained' in our opinion."

Others are more bullish, predicting that Facebook's portfolio of apps, including Instagram and WhatsApp, will pick up any users who ditch or cut back on Facebook itself.

"We think Facebook can overcome the most recent data issue, as over time, we expect it to regain user trust around data security and privacy. Thus, we don't see users walking away from Facebook properties or otherwise negating the firm's network effect moat source," Morningstar Equity Research's Ali Mogharabi wrote in a note on April 20.

"Plus, Facebook owns the two largest (and perhaps most valuable) social networking properties, and any migration of users or usage away from Facebook may simply shift toward its Instagram platform."

RBC Capital Markets, meanwhile, expects any drop-off to be short-lived: "We do believe there may be near-term pressure (Q1/Q2) on User and Engagement growth @ Facebook, given all the negative media attention on the data controversy, though do not see a material long-term impact."

Pivotal Research Group

Data from Pivotal Research Group showing a decline in time spent on Facebook since late 2016.

Complicating matters is the fact that Facebook engagement was already in decline - and on the company's Q4 2017 earnings, executives said the company would be making changes that may reduce it further as it tries to prioritise "meaningful connections."

"It's always going to be very hard to connect Cambridge Analytica to a specific outcome for Facebook if they're already exhibiting user decline, usage decline, and they already said in January they're going to design a platform to cause more declines," Pivotal's Brian Wieser said on a call.

"How are we going to isolate for it? I think it's probably safe to say relatively few people will completely abandon Facebook, like truly deleting Facebook. But ... people who are already diminishing their use of the platform will continue to do so."