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Facebook analysts remain bullish despite looming FTC fine

JP Mangalindan
Chief Tech Correspondent

Even with a massive regulatory fine on the horizon, which prompted Facebook (FB) to write down $3 billion during the first-quarter of 2019, analysts remain bullish on the social network’s long-term prospects.

Following the company’s better-than-expected first-quarter 2019 earnings on Wednesday afternoon that beat Wall Street estimates on revenues and earnings, at least six Wall Street analysts raised their price targets for Facebook, maintaining a “Buy,” “Overweight” or “Outperform” for the stock. Wall Street’s vote of confidence comes despite a $3 billion to $5 billion fine Facebook expects to pay for potentially violating a 2011 consent agreement with the FTC, which required the social network to abide by a "comprehensive privacy program" and get the "express consent" of Facebook users before sharing their data.

UBS analysts Eric J. Sheridan, Alexandra Steiger and Alex Vegliante on Wednesday upgraded their rating on Facebook stock from “Neutral” to “Buy” and raised their price target from $170 per share to $240 per share. The three analysts pointed to Facebook’s consistent ability in recent quarters to beat Wall Street estimates on revenues and earnings, driven largely by Instagram’s revenue growth and Facebook user engagement. (Indeed, KeyBanc Capital Markets estimates 50% of Facebook’s revenues in 2019 will come from Instagram.)

Facebook analysts remain bullish on the stock despite a looming regulatory fine. Source: AP Photo/Marcio Jose Sanchez, File

“Instagram is now one of the Internet's large scaled digital ad platforms that can sustain growth and operating leverage (even as the platform transitions to Stories/Shopping) for years to come,” Sheridan, Steiger, and Vegliante wrote in their note on Wednesday. “While concerns will persist about core Facebook maturation, regulatory headwinds and/or safeguarding the platform for a privacy-first approach, we think the market now better understands many of those risks (as they dominate almost all of our investor conversations).”

An excellent ‘straightforward’ quarter

Credit Suisse analysts Stephen Ju, Nicole D’Souza, Philip Wang, Yoni Yadgaran, who maintained their “Outperform” rating on Facebook, raised their price target from $211 to $235. They welcomed a “straightforward quarter” following a “year of controversy.”

“More importantly from a product/strategic perspective, these execution wins are affording management the luxury to de-prioritize monetization of Messenger and WhatsApp to focus on privacy,” wrote Ju, D’Souza, Wang and Yadgaran in their note on Thursday. “Although management called out the potential for regulatory activity to negatively affect its ability to improve targeting, we believe what impacts Facebook will do the same for other platforms as well.”

Facebook has been rocked for over a year by a series of data privacy scandals, including the Cambridge Analytica controversy in March, in which it was revealed voting firm Cambridge Analytica had gained unauthorized access to the data of up to 87 million Facebook users.

As a result, Facebook expects to pay the FTC between $3 billion and $5 billion. And while the looming regulatory fine, the largest the FTC has ever levied on a tech company, is undoubtedly significant, it also represents a fraction of Facebook’s revenues: between 20% and 33% of Facebook’s first-quarter 2019 revenues or just 5% to 9% of the social network’s total revenues for 2018.

Bullish on Stories

Nomura Instinet analysts Mark Kelley, Andrew Marok and Ryan Bressner, maintained their “Buy” rating on Facebook while increasing their price target from $215 per share to $226 per share on Thursday. In particular, they were bullish on the upside potential for the Stories format across Facebook, Messenger and Instagram.

Facebook announced on Wednesday Facebook Stories is now used by 500 million users, with 3 million marketers placing ads in Stories across Facebook platforms, including Facebook, Messenger and Instagram. (The company did not disclose how much ads placed in Stories generate in terms of revenues or whether a majority of those Stories ads are placed on Instagram.) Although it currently costs advertisers less to place ads in Stories, Nomura Instinet sees huge upside potential for the format, which Facebook copied from Snap (SNAP).

“We reiterate our Buy rating and continue to expect upward revisions this year as Stories ramps, with longer term opportunities in ecommerce and payments providing incremental revenue over time,” added Kelley, Marok and Bressner in their note, published on Thursday.

Facebook stock was up 6% on Thursday following the social network’s earnings.

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