In the past 48 hours, Facebook has faced challenges that might have sunk another company.
It has agreed to cough up $5 billion in a US settlement over the Cambridge Analytica privacy scandal; acknowledged being the subject of a Federal Trade Commission antitrust investigation and faced speculation that it’s the target of a separate Department of Justice investigation into competition; and paid a $100 million fine to the Securities and Exchange Commission.
And all this against the backdrop of Facebook having to justify the way it treats content moderators after a horrifying article from The Verge and after CEO Mark Zuckerberg’s cofounder and one-time friend, Chris Hughes, turned on the company and called for its breakup.
In short, Facebook’s house is on fire. Not that you’d know it by checking out its stock performance.
In the wake of the firm’s second-quarter results on Wednesday, Wall Street was universally bullish and its share price is up. Multiple analysts raised their target price for Facebook and were generally optimistic about the company’s prospects.
So what’s going on?
Facebook anticipated the $5 billion penalty, indicating it has a good handle on how it will be treated by global regulators
Facebook reported in its previous quarterly earnings that it had set aside $3 billion in anticipation of a penalty from the FTC over the Cambridge Analytica fiasco. The company predicted that a fine could total as much as $5 billion.
That prediction turned out to be correct.
Wall Street tends to like consistency and predictability, and Facebook’s ability to anticipate regulatory behavior and head off any surprises is, therefore, reassuring.
This is a testament to Facebook’s increased lobbying efforts, both at home and abroad. These efforts ensure Facebook is close to the people in power and can influence their thinking. In 2018, Facebook spent a record $12.6 million on lobbying Washington — small change when we’re talking about influencing fines of billions.
Zuckerberg explicitly showed off about being close to the world’s decision-makers during the earnings call too, name-checking French President Emmanuel Macron in his opening remarks. Here’s what he said:
“This quarter I spent time in Europe talking with policymakers about how this could work. I met with President Macron to discuss a framework for harmful content. This is an area where I believe there could be an effective public process led by democratically elected governments in Europe, and perhaps in the US, a process for industry standards and self-regulation.”
In other words, Facebook has a direct role in shaping the global regulation that might hurt it.
Analysts were accordingly dismissive of any threat. “While regulatory scrutiny is almost certain to remain high, we believe the risk to Facebook’s business from broad public concern about privacy has passed,” analysts at KeyBanc wrote.
“Further, we see little in current or proposed regulatory actions that we believe meaningfully threatens the competitive advantages Facebook holds in reach, variety, targeting ability, and measurement. This creates the potential for sentiment to improve on the name, which could drive further upside in the shares.”
Analysts at SunTrust Robinson Humphrey added: “We view the settlements with the FTC over Consent Decree and the SEC positively as they remove two major regulatory roadblocks, increase privacy compliance/oversight without materially altering the way FB collects/uses consumer data.”
Wall Street’s favorite tech metric is growth, and Facebook is growing
Facebook mostly beat analyst expectations on Wednesday, reporting a 28% year-on-year jump in revenue to $16.89 billion and earnings per share of $0.91 — affected by the FTC deal. Daily active users were up 8% to 1.59 billion, while monthly active users were also up 8% to 2.41 billion.
Read more: Facebook’s humbling deal with the FTC is the biggest assault on Mark Zuckerberg’s power in the firm’s history
CFO Dave Wehner sounded notes of caution, warning of growth in the firm’s expenses and deceleration in revenue growth. But analysts at Jefferies were so impressed by Facebook’s second-quarter performance that they questioned Wehner’s warnings.
“Considering the improvements FB made to core Facebook and continued momentum on Instagram, we question how much FB’s revenue growth will decelerate in 2H19/1H20,” they wrote.
Facebook’s only competition is itself, and advertisers aren’t going anywhere
Some analysts did acknowledge that Facebook faced regulatory threats. But for now those threats don’t seem to be affecting the core way Facebook makes money: advertising. Until one directly affects the other, analyst bullishness is unlikely to let up.
They particularly called out Facebook’s “Stories” format on Instagram, a format popular with users and advertisers alike. This shift demonstrates that Facebook is able to balance out the decline in its core Facebook app with different services and formats — and means it’s less likely to face any threats from external competition.
There’s also the fact that people are increasingly buying items through Instagram, putting Facebook in a good position to shift into payments and commerce.
“Emerging formats like Stories and Shopping are gaining more traction with advertisers, and we believe they will drive the business longer term,” analysts at Jefferies wrote, adding: “We believe that as demand grows for Stories, we will begin to see a more material contribution from this format looking ahead to 2020. While Shopping is still an early opportunity for FB, our checks indicate that advertisers are seeing large returns and want to spend more ad dollars on the format.”