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Facebook versus the Feds

Last month, the Federal Trade Commission (FTC) hit Facebook, Inc. (FB) with a record-breaking $5 billion fine in response to the company’s lax practices in protecting user data privacy. The company can afford the fine, although it did record a one-time $2 billion cash earnings hit in the last quarter. More importantly, the sheer size of the settlement sent a message to the tech industry generally that the FTC is going to take data privacy seriously.

Now there’s another issue coming up. Once again, the FTC has been investigating Facebook, but this time the underlying matter is one of corporate monopoly and fair business practices. The FTC, in conjunction with the Department of Justice, is opening an anti-trust investigation into Facebook – and other tech giants, such as Alphabet (GOOGL) and Amazon (AMZN) – at least partly in response to popular perception that the corporate giants have gotten too big.

The popular push to investigate Big Tech is bipartisan. The contenders for the Democratic Presidential nomination have used it periodically as an applause line – especially Senator Elizabeth Warren, who has a reputation and background in consumer protection – but the Republicans also have a beef with Big Tech. President Donald Trump has regularly criticized the perceived left-wing bias of the giant tech companies, as both unfair and unrepresentative of the average American.

What Will the FTC Look For?

While the Department of Justice will probe Facebook’s practices in relation to criminal law, the FTC will conduct a civil investigation into the company. Most likely, the FTC investigation will come under the agency’s Bureau of Competition, which enforces the civil side of anti-trust legislation, as well as investigating mergers and unfair or uncompetitive business practices.

That last is a point that may hit Facebook hard. The company has built up its advertising clout and its social media reach through a series of strategic acquisitions, most notably the purchases of Instagram and WhatsApp. Each of those brought in over 1 billion users, and Facebook now boasts a total reach of more than 5 billion people worldwide across its network. No competing social media company can even come close to matching those numbers.

And that is what has the FTC so interested. The agency will be probing Facebook’s acquisition practices, with the explicit goal of determining whether or not the company has used acquisitions to neutralize potential competition. In short, the FTC wants to know if Facebook bought off its rivals to build a monopoly.

Facebook as the Hardest Target

It may be Facebook’s poor reputation with the general public that first attracted the Federal scrutiny, but the agencies’ aim may also hold a kernel of strategy. Facebook is a powerful company, with over $55 billion in annual revenue, and plenty of resources to face down a top-level investigation from Federal regulators and law enforcement. A win here by the FTC will send the strongest possible signal to the rest of the social media sector, and the tech world generally, that the regulatory free ride is over, and the sheriff is back in town.

The State of Facebook, Today

So, with Facebook facing serious challenges ahead, let’s step back and take stock of the company. In its Q2 earnings report, on July 24, Facebook beat the EPS forecast by 5.8%, reporting earnings of $1.99 per share even after recording the $2 billion charge to cover payment of the FTC’s privacy violation fine. The EPS was based on quarterly revenue of $16.9 billion, which was 2.4% higher than the expected $16.5 billion. Another important metric, average revenue per user, also beat the analysts’ estimates, coming in at $7.05, 2.6% above the forecast.

And that brings us to users, the base that Facebook uses to hook advertising revenue. While beating on earnings and revenues, Facebook met expectations on active users. The company’s stats showed 1.59 billion daily active users, and 2.41 billion monthly. These are extraordinary numbers. The monthly DAU equals 31% of the global population.

Wall Street’s Analysts React

Facebook, even with all of its reputation and regulatory challenges, retains a Strong Buy rating from the analyst consensus. The stock has received 33 buy and 3 hold ratings in the past three months. The current share price is $184, and the average price target of $234 gives the stock an impressive 26% upside potential.

The most recent analyst reviews are more bullish than the consensus. JPMorgan’s Doug Anmuth boosted his price target on FB to $255, describing Q2 as “fundamentally strong with accelerating growth.” He believes that Facebook will deliver growth next year well in excess of 20%. In line with this, his price target suggests an upside of 40%.

Brent Thill, of Jefferies, also cited the strong Q2 report in his review. He said, “Management guided to constant currency revenue growth deceleration in 2H19/1H20 but considering recent improvements to Core Facebook and momentum around commerce and Stories, we believe investors will question the magnitude of the decel. With OpEx growth outlook unchanged for the full year, we continue to believe in $10 EPS on the horizon.” Thill gives FB shares a $250 price target, with an upside of 37%.

Finally, Brian White, of Monness, ranked #22 overall in the TipRanks database, specifically pointed out that Facebook is likely to beat the negative press: “Although we expect the negative news flow to continue, Facebook is executing well and innovating for the future.” White also increased his price target, to $260, suggesting an eye-opening 42% upside for the shares.