Facebook (NASDAQ:FB) has faced significant backlash from both general users and the investing community since the details of the Cambridge Analytica scandal emerged, with shares dropping as much as 18% in the weeks after the story was first reported. The stock has rebounded a bit since then, but the social media company is now facing an uphill battle as it looks to win back public trust.
Heightened scrutiny of data privacy policies clearly presents a number of headwinds for Facebook’s stock. In what some investors might consider the worst case scenario, a full-blown rejection of the company’s business model could see advertisers and users flee from the platform, while regulatory pressure might result in new laws or fines.
In the meantime, Facebook will likely be forced to spend more cash on security and content vetting, which could hurt its bottom line.
The investors that might be most concerned about Facebook right now are those that focus on environmental, social, and governance (ESG) investing. ESG investing is growing in popularity, especially among young people, and today—more so than ever before—companies are feeling the pressure from shareholders who want their portfolios to coincide with positive outcomes in the world around them.
Up until recently, Facebook might have been considered a darling in the ESG world, but the handling of personal information and the nature of personal privacy on the internet are inherently ethical questions, and it makes sense that the company’s latest data woes might be frowned upon by ESG investors.
Still, it can be tough to measure a company based on its ESG outcomes. One firm attempting to ease this process is Sustainalytics, a leading provider of ESG ratings and research.
Looking at the Sustainalytics grades for Facebook via Yahoo (NASDAQ:AABA) Finance, we can see that the social media company has earned an overall ESG score of 52 out of 100—making it an “Average Performer” in their system. Facebook’s strongest ESG score is Social (60 out of 100), while its weakest category is Governance (39), according to Sustainalytics.
Perhaps even more interesting is that Facebook has earned a Controversy Level of 3, which is enough to count as a “Significant Controversy Level.” Yahoo Finance says that the Sustainalytics Controversy Level is a one to five scale used to identify those faced with “incidents and events that may negatively impact stakeholders, the environment or the company’s operations.”
It is reasonable to conclude that Facebook’s Governance score and Controversy Level have both suffered from the firm’s ongoing data privacy scandal. What’s worse, this is not the only concerning ratings trend that Facebook investors need to be aware of.
Within the past 60 days, Facebook has witnessed five downward revisions to its full-year EPS estimates, outnumbering the two positive revisions it has seen over that time. This negative revision activity has dragged the Zacks Consensus Estimate about 8 cents lower. Still, the stock is clinging to a Zacks Rank #3 (Hold) at the moment.
Analysts are now expecting Facebook to report earnings growth of 15% on 36% higher revenues in 2018. Despite caution-inducing ESG scores and troubling estimate revisions, the internet company remains a viable option for investors focused solely on top- and bottom-line expansion and currently holds an “A” grade for Growth in our Style Scores system.
Interested in hearing more about ESG investing? Check out this recent episode of the Zacks Friday Finish Line podcast with the head of NuShares, a popular ESG fund company:
Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!
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Facebook, Inc. (FB): Free Stock Analysis Report
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