Admittedly, the last few months have been a rough time for Facebook (NASDAQ:FB). Last week, the Federal Trade Commission confirmed the widely anticipated $5 billion fine against the internet giant. This is in response to the FTC’s findings that FB was negligent in handling users’ personal data. While the FTC was once seen as a paper tiger — a regulatory agency with a big bark but no teeth — the FTC has clearly shown it will crack down now with vigor on lapses in data governance at the largest tech firms.
So with all of that in mind, should FB stock investors be worried?
The $5 billion fine Facebook is facing is much greater than $22 million fine imposed by the FTC on Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) back in 2012.
This FTC action marks a new era where government regulators will take a keen focus on consumer privacy issues as well as possible anti-competitive behavior of the largest tech firms on the market. It demonstrates the aggressive regulatory policy that will be taken by the Trump administration, which Democrats have routinely attacked for being far too soft on large corporate interests. On top of the U.S. government, European regulators have also been investigating Facebook for similar issues of data governance. The eventual E.U. fine to be levied against Facebook could likely top $1 billion.
FB and Financial Services … A Yard Too Far?
Further, FB may not be doing its shareholders any favors by expanding into areas that are far removed from its core competency, notably financial services and payments processing. Internet payments is practically a mature industry with major Wall Street banks already well-entrenched alongside several established players such as Square (NYSE:SQ) — established by Twitter (NYSE:TWTR) founder Jack Dorsey. Add to that PayPal (NASDAQ:PYPL) — founded by Elon Musk, and several others, years before he started investing billions for sending the first human colony to the planet Mars.
On top of these established giants, snipping at their heels is a league of promising start ups that are also all fighting for market share in internet payments. Many analysts were taken back when Facebook announced its new initiative to create a cryptocurrency, Libra.
Cryptocurrency is far removed from FB’s backyard. There are also plenty of skeptics questioning whether it is even a viable industry given the increasingly complex anti-money laundering regulations that are now imposed by governments across the world. As such there are also many who now question the long-term prospects of owning Facebook stock.
FB Stock Is Only Getting Stronger
Nonetheless, Facebook’s core business operating model in delivering tangible results for advertisers is rock solid and will likely deliver better earnings in the quarters ahead. In the global media industry, personalization and consumer targeting are utterly essential. Facebook remains the undisputed master of this universe and that position has helped drive Facebook stock higher over the years. It has consistently demonstrated extraordinary expertise to pinpoint specific internet users for targeted consumer advertising.
Certainly, FB is facing regulatory challenges. In its recent SEC earnings filing, the word “regulatory” was cited 37 times. However, all giant tech firms in the entire industry are facing similar if not even greater regulatory scrutiny.
Hardly a week goes by without Amazon (NASDAQ:AMZN), Google, Netflix (NASDAQ:NFLX) or Microsoft (NASDAQ:MSFT) being cited in the media for some regulatory investigation somewhere in the world. This is the new challenge of the digital era: ongoing government scrutiny and massive fines.
Bottom Line on Facebook Stock
Taking the big picture long-term view, advertising sales at FB are strong. Corporates are by no means pulling back their internet ad spending. Annual revenues last year surpassed $55 billion. They have been steadily increasing over the years and are now over triple the near-$15 billion in sales reported back in 2015.
With the price of FB stock recently closing at $202, just off its 52-week high of $218, most analysts are forecasting a one-year target of $223.
The next earnings announcement for Facebook is set for July 24. Already, the company wrote down $3 billion from its first-quarter results to account for the anticipated FTC settlement.
FB will finish Q2 with another $2 billion written off to pay the rest of the fine. But all this bad news is already baked into the price.
For the long run, most analysts agree that Facebook stock is a buy and should be bought on any market dips.
As of this writing, Theodore Kim did not hold a position in any of the aforementioned securities.
