Facebook Inc. (FB) may be in for a record fine from the Federal Trade Commission (FTC), but the market doesn't appear to be worried.
Shares of the Menlo Park, California-based social media giant surged around 9% in pre-market trading Thursday to approach the $200-per-share mark for the first time since July 2018.
The stock's jump follows a first-quarter earnings release on Wednesday evening that beat analyst estimates on the top and bottom lines and reflected solid growth in daily active users despite the already massive user base at Facebook, which is a holding of Jim Cramer's Action Alerts PLUS charitable trust.
"We believe Facebook's virtual ownership of the social graph, strong competitive moat, and focus on the user experience position it to become an enduring, blue-chip company built for the long term," J.P. Morgan analyst Doug Anmuth said in lauding the earnings report. "Facebook is in rarefied air across the combination of scale, growth, & profitability, as the company's massive reach and engagement continue to drive network effects, and its targeting abilities provide significant value to advertisers."
In Anmuth's view, advertisers will continue to flock to the social media standby, prompting him to raise his price target from $210 to $245, a price that would mark an all-time high for Facebook shares.
To be sure, a key roadblock that Facebook continues to face in terms of garnering advertiser and consumer trust is its privacy problem, something that is becoming an expensive issue.
"Total expenses were $11.8 billion, up 80%. This includes a $3-billion accrual taken in connection with the inquiry of the Federal Trade Commission into our platform and user data practice," CFO David Wehner told analysts on Wednesday evening. "This matter remains unresolved and we estimate that the associated range of loss is between $3 billion and $5 billion."
If the fine does indeed fall in that range, it would obliterate the previous $22.5 million record fine levied against Alphabet Inc. (GOOGL) in 2012 for its violation of a commission order.
The Facebook fine, which is still being negotiated, stems from the much-publicized Cambridge Analytica scandal in which political actors were allowed to access the personal data of 50 million Facebook users and allegedly sought to influence their votes.
The scandal has been hanging over Facebook stock for nearly a year as many questioned whether users and advertisers would continue to stand by the company given their data management misgivings.
The problem has also necessitated significant investment from the Mark Zuckerberg-led behemoth as reflected in the company's 36% headcount increase from 2018. The security staff is a leading driver of this workforce increase.
However, the market appears to be relieved that the matter is coming to a close, regardless of a record fine. Further, as the user base continues to grow, margins are maintained and advertisers essentially have no choice but to engage the hulking user base, the bull case appears intact.
Facebook Legal Woes = library fine— Jim Cramer (@jimcramer) April 25, 2019
"We find it hard to criticize Facebook's performance, and we believe that the $3 billion accrual fairly accounts for the potential fine the company faces for various data breach and other regulatory issues," Wedbush analyst Michael Pachter said. "While we expect significant scrutiny of Facebook's operations and practices, we think management is sincere in its desire to protect user privacy and to keep the platform safe."
Pachter added that the workforce build-out should be seen as a positive as it indicates the company is acting to police itself.
"We expect the spending growth we have modeled to be adequate to address internal and political pressures to do the right thing, and we ultimately think that Facebook can be fixed," Pachter concluded. "This is likely going to take a long time, and we think that Facebook management is up to the task."
In the end, analysts appear to believe that as much as campaigns like #DeleteFacebook and advertiser boycotts populate headlines, they appear to be mostly bluster based on the earnings results that reflected a sticky user base and growing revenues.
"Although management called out the potential for regulatory activity to negatively affect its ability to improve targeting, we believe what impacts Facebook will do the same for other platforms as well," Credit Suisse analyst Stephen Ju advised in a note to clients. "Given advertiser decisions to allocate budgets to one versus another outlet are made on a relative ROI basis, we believe Facebook remains well-equipped to capture as opposed to cede share."