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Facebook earnings include admission of two antitrust probes and billions in fines, but stock still gains

Shares of the social-networking behemoth rose 2% in the extended session Wednesday after it announced second-quarter results that beat analysts’ estimates while attesting to its regulatory scrutiny. Facebook’s stock is up 56% this year, with the S&P 500 index gaining 20%. Read More...

An antitrust probe of big tech, a record Federal Trade Commission settlement, another settlement with the Securities and Exchange Commission, confirmation that it is being investigated by the FTC and Department of Justice — none of it seems to faze Facebook Inc. investors.

Shares of the social-networking behemoth momentarily initially rose 4% in the extended session Wednesday after it announced second-quarter results that attested to intense regulatory scrutiny but beat analysts’ estimates. Shares moved closer to a 2% gain as the after-hours session continued. Facebook’s stock FB, +1.14%  is up 56% this year, while the S&P 500 index SPX, +0.47%   has gained 20%. (Shares later dipped to negative territory after-hours following a prediction of “revenue deceleration” in a call with analysts discussing the quarter.)

The Menlo Park, Calif.-based company reported second-quarter net income of $2.6 billion, or 91 cents a share, compared with $1.74 a share in the year-ago period. Revenue increased 28%, to $16.9 billion from $13.23 billion in the year-ago period. Analysts surveyed by FactSet had estimated $1.87 a share on revenue of $16.5 billion on average.

A record $5 billion settlement with the FTC, announced early Wednesday, left a mark. Facebook recorded a $2 billion charge in the second quarter, after absorbing a $3 billion hit during its previous quarter. Excluding those charges, Facebook would have earned $1.99 a share.

“The online technology industry and our company have received increased regulatory scrutiny in the past quarter,” Facebook said in its earnings release after the market closed Wednesday. “In June 2019, we were informed by the FTC that it had opened an antitrust investigation of our company. In addition, in July 2019, the Department of Justice announced that it will begin an antitrust review of market-leading online platforms.”

See: Facebook officially agrees to record FTC settlement

Facebook said monthly-active users grew 8% to 2.41 billion, in line with FactSet projections. Average revenue per user (ARPU) improved to $7.05, above FactSet’s forecast of $6.87.

“Now we have a clear path forward,” Zuckerberg said in the conference call with analysts. “We have clear guidance from regulators” on how to proceed with business.

The revenue and ARPU spikes highlight what Wedbush Securities analyst Michael Pachter expects to be revenue and profits growth for “many years,” largely through expansion overseas and increased monetization of Facebook properties Instagram, WhatsApp, and Messenger. In a research note to clients Monday, Pachter maintained an Outperform rating and $220 price target on Facebook shares.

More than anything else, the quarter illustrates again the wildly diverse reactions the company triggers. Privacy advocates, regulators, and politicians continue to treat it as a punching bag, yet advertisers remain faithfully dedicated because of its reach and ability to target potential customers.

Goldman Sachs reiterated its Buy rating on Facebook on Wednesday before the earnings news with a price target of $228, citing a favorable outlook for the company’s digital-advertising trends. Antonio Lucio, Facebook’s chief marketing officer, last month said it could more than double its global advertising spending as it tries to regain consumers’ trust.

“Their ad machine is going to continue to grow until there are privacy regulations,” Beth Kindig, a technology analyst in San Francisco, told MarketWatch in an email message. “It’s still an all-or-nothing stock. Great financial (results) and balance sheet in the middle of high-risk regulatory issues.”

RBC Capital Markets analyst Mark Mahaney is more cautious. He’s concerned about increasing regulatory pressures but ruled out a breakup of Facebook. Advertising sales have cooled, he said, but the Libra cryptocurrency project marks a “potential watershed moment.” Still, Mahaney rates Facebook shares outperform with a price target of $250.

Not everyone is sold on Facebook. Rising operational costs related to security and a shift among users to Instagram should soften year-over-year EPS, warns Stifel analyst Scott Devitt. He has a Hold rating and price target of $175.

And then there’s the government’s official antitrust investigation announced Tuesday, with Facebook, Apple Inc. AAPL, -0.08% Amazon.com Inc. AMZN, +0.32% and Alphabet Inc. GOOGL, -0.72% GOOG, -0.73%  in regulators’ crosshairs, which could create “near-term uncertainty” among investors, Wedbush Securities analyst Daniel Ives said in a note late Tuesday.

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