Half of the headlines you see about Facebook (NASDAQ:FB) this year seem to take place in a Congressional setting and the half in its home base in the Silicon Valley. After the Cambridge Analytics scandal, regulators, this time the Federal Trade Commission (FTC), have not let the brouhaha die down yet. As a result of regulatory uncertainty, Facebook stock has seen some volatile swings throughout the first half of the year, but the trajectory is still up and to the right.
The latest news, according to a source knowledgeable about the discussions, is that Facebook is, “headed toward an agreement with the U.S. government over its privacy policies and practices that would put it under 20 years of oversight.”
This extended oversight is in the addition to the estimated loss fine of $3 to $5 billion as disclosed in the Facebook’s first quarter results. The outcome is still unresolved, but even at the high end of the range the financial results show that it’s not a hit that FB stock can’t absorb and easily, at that.
Founder and CEO, Mark Zuckerberg, has demonstrated a willingness to cooperate with authorities and step up privacy protection for users. These efforts to reduce regulatory risk and win back the trust of users will lift the weight of FB stock.
A Closer Look at Facebook Stock
Why such a cavalier attitude toward the billion-dollar fines, one might ask? Well, the quarterly results say everything.
Facebook generated over $15 billion in revenue in the quarter. They grew it 26 percent year-over-year. Even adjusting for a $3 billion legal expenses (FB was smart to account for it preemptively rather than let it hang over the stock), net income was well over $2 billion. One-time expenses/write-offs happen. It’s just a cost of doing business.
Note that without the fine, operating margins would have been 20 percent higher and diluted EPS would have been $1.04 higher.
What about metrics? They too, show an underlying business that is operating smoothly. Daily active users (DAUs) averaged 1.56 billion in March, representing an 8% increase year-over-year. Users don’t seem that bothered by the privacy concerns, after all. DAU growth was buoyed by international users in India, Indonesia, and the Philippines.
It’s easy to forget how global Facebook’s reach is. It means that the company’s market is the entire world (except in China where Facebook is blocked). The sky really is the limit to monetize all the active users/eyeballs scanning the newsfeeds.
Another important metrics, monthly active users (MAUs) showed a similar 8% increase in March at 2.38 billion. MAUs measure of the size of the global active user community on Facebook. Here too, Asia drives the bulk of the growth.
These metrics don’t include the rest of the Facebook “family” either. An estimated more than 2.1 billion people now use Facebook, Instagram, WhatsApp, or Messenger. Around 2.7 billion people use at least one of Facebook’s family of services each month. These 2 billion+ audiences are assets unto themselves. All investors have to do is be patient as Facebook generates more ad revenues and in-app revenues.
The Bottom Line on Facebook Stock
Overall, Facebook had a very strong quarter. Everything is pointing to an even better second half of 2019. The FTC probe is not completely behind the Company, but the brunt of the damage seems to have been done, financial and otherwise. FB isn’t going anywhere anytime soon and probably isn’t going to get broken up by a regulatory body so long as they keep up their cooperative attitude.
Facebook stock has the potential to get to new highs as the company delivers betters growth numbers in the coming quarters and puts the regulatory overhang to bed.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.