Facebook's house is on fire, but there are 3 reasons why Wall Street thinks it will emerge unscathed (FB)

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• Wall Street analysts were pretty positive about Facebook’s second-quarter earnings, which mostly beat expectations.
• This defies belief, given the bonfire of a $5 billion penalty, a $100 million SEC fine, an FTC antitrust probe, a wider competition investigation, and political threats to break up the firm.
• But analysts took the bad news in their stride.
• They pointed to continued growth, Facebook’s ability to predict and shape regulation, and its ingenuity in offsetting declines in the core Facebook app with new services and formats.
• Facebook ultimately doesn’t have much competition, and advertisers aren’t going anywhere either.
• Click here for more BI Prime stories.

In the past 48 hours, Facebook has faced challenges that could sink another company.

It has agreed to cough up $5 billion in a US settlement over Cambridge Analytica; become the subject to a Federal Trade Commission antitrust probe and a Department of Justice probe 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 Mark Zuckerberg’s cofounder and one-time friend, Chris Hughes, turning on the company and calling for its breakup.

In short, Facebook’s house is on fire. Not that you know it.

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 last quarterly earnings that it had set aside $3 billion for a potential penalty from the FTC over the Cambridge Analytica fiasco. The company predicted that the settlement could be 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 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, namechecking 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 which 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,” wrote analysts at KeyBanc.

“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, reporting a 28% year-on-year jump in revenue to $16.89 billion, and earnings per share of $0.91 — impacted 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 else

Some analysts did acknowledge that Facebook faces regulatory threats. But for now, those threats don’t seem to be impacting 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.

Analysts at Jefferies wrote: “Emerging formats like Stories and Shopping are gaining more traction with advertisers,
and we believe they will drive the business longer term… 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.”

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