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$FB - Facebook ‘clearly’ feeling the impact of regulatory issues but stock keeps rising

Analyst says privacy drama is weighing on product rollouts and management focus


Authored By Emily Bary

Facebook Inc. investors haven’t been bothered too much by the ongoing threat of regulatory activity, even as it impacts the company’s ability to go about its day-to-day business.
This was on display Wednesday as the company delivered its latest quarterly results. Facebook FB, -2.16%  showed resilient user numbers and monetization improvements, but it also warned that complying with new regulatory agreements would require steep investments and complicate the company’s ability to complete existing product-development efforts.
Facebook shares are down 2% in mid-morning trading.
Macquarie analyst Benjamin Schachter cheered some of the strength in key metrics while expressing caution over the regulatory cloud’s effect on core operations.
“Facebook’s forward-looking P&L would inarguably look much stronger without the looming regulatory issues that are clearly impacting how it is allocating resources,” wrote Schachter, who rates the stock at outperform with a $215 target. “This is not just raising costs (which it clearly is), but also impacting the timing of product rollouts and improvements, ad targeting capabilities, potential M&A, and, of course, management time and focus.”
Deutsche Bank analyst Lloyd Walmsley, in raising his price target to $235 from $230, came away with “increased confidence in the medium-term revenue outlook on the back of re-accelerating growth, two quarters ahead of where we had forecast a re-acceleration.” He downplayed Facebook’s warning of slowing growth as “largely conservative.”
Shebly Seyrafi of FBN Securities cited strong average revenue per user ($7.05 during the quarter) and Facebook’s business in Asia and Europe for hiking his price target to $245 from $230.
Guggenheim’s Michael Morris admitted that safety and security spending will be costly, but he said these moves would benefit Facebook in the long term. “Despite structural changes that will create intermediate-term revenue and profitability headwinds (heightened compliance, slower onboarding of new products, engineering cost requirements), we see the proliferation and trajectory of innovative, growth-oriented products (i.e., Stories, e-commerce/shopping, and video) as offsetting these initial financial setbacks,” wrote Morris, who has a buy rating on the stock and raised his target to $240 from $220.
Facebook also warned of a “more pronounced deceleration” on the top line as the company looks forward to the fourth quarter and 2020, due to ad pricing issues and tough comparisons. But the admission struck Evercore ISI analyst Kevin Rippey as traditionally conservative commentary from the social-media giant, which has a history of making doom-and-gloom predictions before handily crushing them in the quarters to come.
The conservative commentary “should come as no surprise,” Rippey said, while praising other elements of the latest report. Revenue accelerated for the first time in three years and user growth of 8% was stable, “mitigating concerns that trends in the core Facebook app are becoming more challenged.”
Rippey raised his price target to $230 from $225 and maintained an outperform rating on the stock.
At least 20 analysts raised their price targets on Facebook shares after the earnings report. The stock has gained 56% so far this year, as the S&P 500SPX, -0.19%  has risen 20%.

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