Fundamentals Trump Regulation For Facebook Shares?

The specter of increased regulation looms for the largest of tech companies. Breakups may be in the offing, as might new mandates governing how and when and whose data can be shared.

And on Tuesday (June 11), a slew of witnesses tied to the media industry came to Capitol Hill to testify that the information landscape has been forever altered – not altogether favorably – by firms like Google and Facebook. Perhaps no surprise, then, that shares have dipped among these big players.

As noted in this space in coverage of the hearings, the House Judiciary Committee heard from panelists including Sally Hubbard, director of enforcement strategy at the Open Markets Institute. Hubbard testified that “Facebook and Google compete against news publishers that must get through their gates to reach users, due to the two platforms’ concentrated power over the flow of information … because Facebook and Google control the playing field for this competition, publishers never had a fair shot. How can publishers compete against platforms that can tweak their algorithms at any time to bury them?”

But where stocks fall, some observers see opportunity for gains, arguing that uncertainty is baked in while encouraging fundamentals are not yet reflected in the stock price.

In one example, MoffettNathanson Analyst Michael Nathanson said in a note upgrading Facebook from “neutral” to “buy” that “improving underlying fundamentals offset the risk of greater risk of greater regulatory scrutiny.” And in tandem with the upgrade, the analyst maintained the $230 price target.

As is germane to Facebook, and as recounted by CNBC, the Federal Trade Commission (FTC) has been looking at the firm’s competitive practices.

The MoffettNathanson analyst wrote that antitrust actions on the company would be unlikely, as the judicial system, in reviewing competitive actions, generally looks for proof that consumers have been harmed by those practices. One risk lies in the idea that platforms like Facebook can be held liable for user content. But, as the analyst wrote in his note, commerce and messaging remain longer-term trends that will help the customer’s growth, and margins are poised to stabilize. Against that backdrop, regulatory risk is priced in, but the underlying fundamentals are not. The stock recently was changing hands at about $175 a share, and was down mid-single digits in the past several sessions.