Facebook set to report second-quarter earnings amid regulatory overhang

Facebook CEO Mark Zuckerberg at the F8 Developer Conference in 2017.

David Paul Morris | Bloomberg via Getty Images

As Facebook prepares to deliver quarterly results on Wednesday, analysts remain bullish on the company's online ad business, but investors are on edge because of increasing regulatory pressure on Big Tech.

On Wednesday, Facebook struck a $5 billion settlement with the Federal Trade Commission following the 2018 Cambridge Analytica scandal in which the data of 87 million Facebook users was improperly accessed. And late Tuesday, the Department of Justice announced a broad antitrust review of the dominant tech platforms.

Analysts from Argus Research wrote in a report last month that Facebook management faces a "range of daunting challenges" such as "tempering any user backlash, countering unfavorable regulation and improving employee morale."

However, the stock has climbed 54% this year as advertisers continue to choose Facebook and its photo site, Instagram, as valuable places to spend their money because of the eyeballs and the targeting technology. Analysts at Canaccord Genuity wrote in a note on Monday that Facebook's Stories feature, which allows users to share ephemeral photos and videos, "could surprise to the upside."

Analysts are projecting revenue growth of 25% for the second quarter to $16.5 billion, according to Refinitiv. Earnings per share likely increased to $1.88 from $1.74. EMarketer projects Facebook will control 20.2% of the $332.5 billion global online ad market this year, second only to Google at 31.1%.

"As of now, we still expect Facebook's ad revenues to rise at a rate that's faster than digital advertising as a whole this year," eMarketer said in an emailed statement. "But we will be closely monitoring how the company responds to the regulatory scrutiny in its Q2 earnings call, as well as what it says about its user counts and engagement."

The FTC fine is the largest ever imposed by the agency against a tech company and represents approximately 9% of the company's 2018 revenue. The 20-year settlement, which was approved in a 3-2 vote by FTC commissioners, also includes provisions that aim to create a level of independence from Facebook CEO Mark Zuckerberg's decision-making.

Multiple Democratic presidential candidates, including Sens. Elizabeth Warren of Massachusetts and Kamala Harris of California, have talked about breaking up Facebook. The company is also drawing significant scrutiny for the upcoming Libra digital currency and its Calibra digital wallet. David Marcus, the head of Facebook's cryptocurrency project, was grilled by lawmakers on Capitol Hill last week, and Treasury Secretary Steven Mnuchin has also expressed concerns about Libra.

Zuckerberg has said the company is pushing toward privacy in response to the scandals over the last few years, but that's a long-term project and it's not clear if the moves will satisfy Washington.

"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," Wedbush analysts wrote in a note this week. "We ultimately think that Facebook can be fixed."

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