Facebook (NASDAQ:FB) delivered a big quarter but now faces a big government shakedown.
The smallest of the five Cloud Czars earned $2.6 billion, 91 cents per share fully diluted, on revenues of $16.6 billion for the June quarter, up 28% from a year earlier.
Earnings were down 49% as the company paid a $5 billion settlement on privacy violations to the Federal Trade Commission. Investors responded by adding $7.5 billion to the company’s market cap, after a $5 billion gain in pre-earnings trade.
Facebook stock is up nearly 55% in 2019. Shares fell in early trade July 25 as investors digested a two-line section of the earnings release dubbed “other matters.” That notes that the FTC opened an antitrust investigation into the company in June, and the Department of Justice announced its own review as the report was being prepared.
Peak Facebook?
Facebook opened for trade July 25 with a market cap of $584 billion, and a premium price-to-earnings ratio of 30. Volatility ahead can be expected, as the U.S. joined other world governments in seeking drastic action against the company.
Analysts called the $5 billion fine “good news,” noting the company has $50 billion in cash. The fine also comes with extensive oversight. This will be overseen by Michel Protti, formerly vice president of marketing on partnerships, who was named chief privacy officer.
The European Union could still add another $2.2 billion fine for violations of its General Data Privacy Regulation (GDPR). It has been hammering Facebook on privacy for years.
Europe is now going after Facebook over content created by users. New EU legislation would force Facebook and other platforms to quickly remove “hate speech.” Germany, the United Kingdom and France haven’t waited, passing their own hate speech laws against the platform. The new laws would also see bureaucrats policing algorithms.
Political speech isn’t the only restriction Facebook faces. It’s now introducing regulations aimed at keeping content pushing tobacco and alcohol off Facebook or Instagram. So far the actions of heavy users or influencers aren’t being restricted, but that could be coming.
Facebook’s vice president for global affairs, former UK politician Nick Clegg, says the company has been “rocked to its very foundations” by the scandals. These began with accusations its sharing of user data with Cambridge Analytica made Donald Trump president. Facebook joined in creation of a “Global Internet Forum” in 2017 to combat terrorism, which now stores over 200,000 digital fingerprints of suspect accounts.
Now Comes Barr
An even bigger problem may be Attorney General William Barr, who has called for an end to encryption, now the Internet’s default setting. He has also launched a broad-ranging antitrust inquiry against Facebook and most of the other Cloud Czars.
Critics worry that Barr’s effort may not stop hate speech, but place Facebook under the direct control of President Donald Trump, who is often accused of inciting hate in his Twitter (NASDAQ:TWTR) feed.
Democrats, meanwhile, have gone even further, suggesting Facebook and the other Cloud Czars be broken up, with services like WhasApp and Instagram separated from the main company. How Facebook would continue investing in its network of cloud data centers without that cash flow is never explained.
The Bottom Line on FB Stock
So far, analysts have taken a bullish view of Facebook’s problems. They note that regulation could cement the company’s market position, with costs that new entrants in the social media space would be unable to bear.
But Facebook, and the rest of the free web, was built on the cash flow from advertising. The costs of policing speech, and the self-censorship of users backing away from the social web entirely, could yet prove an existential threat.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
