Goldman Sachs has located 2 serious Facebook risks ahead of new EU regulation
- Facebook's implementation of the European Union's new data regulations carry two significant risks, according to Goldman Sachs analyst Heather Bellini.
- User deletions and falling advertising prices are the two risks mentioned.
- There's a possible solution to one of those risks, but it could backfire.
- Watch Facebook stock trade in real time here.
Facebook is at or near the top of the list when it comes to companies investors are concerned about in light of the European Union's new General Data Protection Regulation (GDPR) that is set to go into effect on May 25.
News of the Cambridge Analytica scandal breaking in late March brought data privacy concerns to the surface, and Goldman Sachs analyst Heather Bellini says the social-media giant is facing several risks ahead of GDPR's implementation.
At $3.04 billion, the EU represented just a tad over 25% of Facebook's $11.97 billion in revenue during the first-quarter, according to Statista.
Facebook, along with Google, is finalizing new platform policies and protections for users ahead of the upcoming GDPR implementation on May 25, and Bellini says there are two related risks investors should be watching out for.
User deletions
Under GDPR, Facebook must ask users if they'd prefer to opt-in or opt-out of having their personal data shared with advertisers. Facebook is creating alerts that explicitly ask users to opt in or out. Once the user decides, he or she is presented with an updated terms of service, which they then accept or reject.
Bellini pointed out that when users are shown the updated terms page they are "required to either agree or delete their account." While Bellini does not necessarily believe there will be a high number of deletions, she says Facebook certainly doesn't want to risk losing users because that would be a drag on advertising dollars.
Advertising prices
The other risk Bellini mentioned is falling ad prices. If the user accepts the updated terms of services, and those terms show that he or she opted out of having personal data shared with advertisers, Facebook will actually label ads on that account as "less relevant," according to Bellini. If those ads are less relevant, that "would make them less effective, and could impact the price of ads served to those users," she said.
What can Facebook do?
"We could see Facebook offset that lower price by increasing the ad load on the News Feeds of users who opt out of specific targeting, but we do not expect the company do so, as it would degrade the user experience," she wrote. In short, Facebook could combat lower ad prices by displaying a higher number of ads; however, that could backfire by decreasing the number of users and therefore decreasing the number of ad impressions.
Facebook is up about 1% this year.
