By Jon Swartz
The $5 billion bomb the Federal Trade Commission is expected to drop on Facebook Inc. would seem to presage choppy waters for the social-media company, but investors hardly seem to care.
On the day Facebook’s /zigman2/quotes/205064656/composite FB -0.16% record fine was first reported, its stock reached its highest price in nearly a year — perhaps out of relief that the long-rumored fine was final and not even more. But it could also signal longer-term headaches for Facebook, which faces a Justice Department investigation into its business practices — Apple Inc. /zigman2/quotes/202934861/composite AAPL +0.03% , Alphabet Inc.’s /zigman2/quotes/202490156/composite GOOGL -0.65% /zigman2/quotes/205453964/composite GOOG -0.55% Google, and Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +0.54% could also face antitrust probes as Big Tech faces a backlash from the government — not to mention stricter data-privacy legislation that could restrict how Facebook collects and monetizes personal information.
For its second-quarter earnings report, scheduled for July 24, it could mean a $2 billion hit to cover the FTC settlement. The company took a $3 billion charge in anticipation of a settlement in the first quarter, though it could wait until the fine is officially announced to recognize the rest of the fine.
Despite the enormity of the settlement and tacit acknowledgment of Facebook for its privacy transgressions, analysts like Justin Post of Bank of America Merrill Lynch consider it a “positive step.” He said a $2 billion additional charge, which equates to less than $1 a share in stock value, “signals better cooperation” with the federal government and represents “very minor impact on cash balance or stock value.” Post maintained a Buy rating and price target of $224.
Still, investors should take a long, hard look at risk factors in its most recent 10-Q filing in late April and search for “regulatory,” and they’ll find 42 references.
“We are and expect to continue to be the subject of investigations, inquiries, data requests, actions, and audits in the United States, Europe, and around the world, particularly in the areas of privacy, data protection,” Facebook said in its 10-Q filing.
“Proposed or new legislation and regulations could also significantly affect our business,” it continued, referencing Europe’s current General Data Protection Regulation law and the forthcoming California Consumer Privacy Act.
What to expect
Earnings: Of the 43 analysts surveyed by FactSet, Facebook on average is expected to post adjusted earnings of $1.88 cents a share, up from the $1.75 a share expected at the beginning of the quarter. In the second quarter a year ago, Facebook reported $1.74 a share in profit. Estimize, which crowdsources estimates from buy and sell-side analysts, fund managers, academics and others, is forecasting EPS of $1.97 a share, based on 301 estimates.
Revenue: Wall Street expects revenue of $16.5 billion from Facebook, according to 40 analysts polled by FactSet. Analysts are looking for monthly active users of 2.41 billion, up 8% year-over-year, according to FactSet. Facebook reported revenue of $13.23 billion during last year’s second quarter, leading to diluted earnings of $1.74 per share. It then reported 2.23 billion monthly active users. Estimize contributors are forecasting revenue of $16.6 billion on average.
Stock movement: Facebook shares are up 52.7% this year through Thursday’s close at $200.78 a share, compared with a gain of 19% for the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.02% . Facebook stock is down 4% over the last 12 months.
Of the 47 analysts who cover Facebook, 40 have buy or overweight ratings, 6 have hold ratings, and 1 has a sell rating, with an average price target of $221.98, according to FactSet data.
What to look for in the call
With the FTC settlement about to be behind it, and with operating costs expected to decline next year after a push to beef up security in 2019, analysts anticipate a bump in EPS and profitability in the future.
“We maintain Google and Facebook retain excellent profit growth opportunities that are undervalued at the current prices, and believe both could benefit from improving cash flow profiles over the next 12 months,” KeyBanc Capital Markets analyst Andy Hargreaves wrote in a July 16 note. He maintains an Overweight rating on Facebook shares and price target of $220.
Shebly Seyrafi, an analyst who covers Facebook at FBN Securities, says the combination of Instagram’s surging revenue growth and shrinking operating costs next year will lead to EPS of above $9 in 2020 from below $7 this year.
“As long as advertisers get high ROI on Facebook, by far the largest platform in town, there is no need to look elsewhere,” Seyrafi, who has an Outperform rating and $230 price target, told MarketWatch. “Beside Instagram, a private Messenger, WhatsApp payments in India, and Libra, Facebook will be more than fine.”
Seyrafi isn’t as bullish on Libra, Facebook’s cryptocurrency project that has been maligned by everyone from billionaire Mark Cuban to President Donald Trump and Federal Reserve Chairman Jerome Powell. He calls it a “moon shot” with potential but plenty of regulatory hurdles in front of it. The digital currency was the target of pointed questioning in both the Senate and House for two days last week, with various members calling the concept “delusional,” “crazy” and “dangerous.”