(In this series on Comeback Stocks, Investopedia looks up close at companies that have staged sustained stock turnarounds, their future challenges and prospects.)

Shares of social media giant Facebook Inc. (FB) closed trading on Sept. 23, 2019 at $186.82, or 14.5% below their all-time high of $218.62 set in intraday trading on July 25, 2018, but this nonetheless represents a strong turnaround. The stock bottomed out at $123.02 on Dec. 24, 2018, after plummeting by 43.7% over the course of nearly five months. Since then, it has rebounded by 51.9%. From its own intraday low of 2,351.10 on that same day, the S&P 500 Index (SPX) has advanced by 27.3%.

The Problem

Facebook was under siege during the second half of 2018, beset by multiple controversies over data breaches, privacy violations, and efforts by foreign operatives, particularly in Russia, to influence U.S. public opinion and U.S. elections, including the 2016 presidential election. Facebook became a target of investigations in Congress and by U.S. regulatory agencies. Prospects of huge fines, possible legal or regulatory restrictions on its future growth, and maybe even a breakup of the company, all seemed to be rising, causing the stock price to crater.

In particular, the U.S. Federal Trade Commission (FTC) probed Facebook's relationship with Cambridge Analytica, a U.K.-based political consulting firm that ceased operations in the aftermath of this scandal. The developer of a personality quiz posted on Facebook sold the data that he collected to Cambridge for use in their data mining efforts, without the knowledge or consent of Facebook users, as described by Bloomberg. Since Cambridge worked for candidates with conservative, or right of center leanings, including 2016 Republican presidential contenders Ted Cruz and Donald Trump, Democrats turned up the heat.

Key Takeaways

  • Facebook stock plummeted in late 2018, but since has rebounded.
  • A big fine by the FTC for privacy violations can be taken in stride.
  • Its mountain of user data remains a key competitive advantage.
  • However, an antitrust probe focuses on its buyouts of competitors.

The Solution

In July 2019, Facebook agreed to pay a $5 billion fine to the FTC. Its full year 2018 net income exceeded $22 billion. “I can’t believe Facebook didn’t pay more for this,” Alex Stamos, a former Facebook executive, said on Twitter.

The settlement with the FTC still allows Facebook to collect whatever user data it wants, and analyze it in whatever way it wishes, such as to optimize the targeting of ads, as long as users consent. In particular, such consent must be particularly explicit before Facebook attempts to share user data with a third party.

“While the Cambridge Analytica and other data privacy violations are serious, we see this [FTC settlement] as a positive step,” Justin Post, an analyst with Bank of America Merrill Lynch, wrote in a note to clients, as quoted by Barron's. “We see potential upside and several assets potentially under-monetized (Messenger, stories, video),” he added.

Future Challenges

The FTC has an antitrust investigation underway which seeks to determine whether Facebook bought Instagram and WhatsApp solely to eliminate competitors. Meanwhile, Facebook reportedly is planning to combine all its messaging networks and rebrand them as “WhatsApp from Facebook” and “Instagram from Facebook,” in a move that may stymie proposals to break up the company, as some critics propose, including several contenders for the U.S. presidency in 2020.

Indeed, "[the] likelihood of [a] breakup scenario still looks nil," as Mark Zgutowicz, a senior research analyst at Rosenblatt Securities, asserted in a note to clients, as quoted by Barron's. Both Justin Post and he have buy ratings on Facebook. “For any anticompetitive behavior they want to get away with, they’re going to say, ‘The FTC made us,’ ” observed Matt Stoller, a fellow at the Open Markets Institute, per Bloomberg. “That’s what they bought for $5 billion,” he added.

Earnings Outlook

Facebook is scheduled to report 3Q 2019 earnings sometime between Oct. 28 and Nov. 1, per Yahoo Finance. The consensus estimate calls for EPS of $1.91, up by 8.5% year-over-year (YOY) and by 110% from 2Q 2019. Revenue is projected to grow by a robust 26.5% YOY and by 2.8% from 2Q 2019.

Facebook's reported EPS in each of the first two quarters of 2019 were about half the consensus estimates. The stock price at the close on Sept. 23 was 9.1% below the 2019 high of $205.47, set in intraday trading on July 16.

Nonetheless, 41 of the 44 analysts covering Facebook, or 93%, rate it a buy or a strong buy. The average price target is $235.55, or 26.1% above the Sept. 23 close.