Despite a nearly 19% decline in shares of Facebook Inc. (FB) Thursday, which erased more than $15 billion of Mark Zuckerberg's net worth, the stock may still not be in bargain territory yet.
That’s according to the Wall Street Journal, which reported that even with some analysts downgrading their rating on the world’s largest social media company after a bad second quarter earnings report, more than 85% of Wall Street analysts have buy ratings on the stock. The analysts, argued the Wall Street Journal, aren’t taking into account the further impact from increased regulatory scrutiny coming from new data privacy laws in Europe and California. Because it's not clear what impact these and possible future laws will have on Internet companies and because Facebook has yet to face any actions by regulators on it's Cambridge Analytica data scandal, valuing the social media company becomes more difficult and less reliable. (See more: Wall Street Dings Facebook With Downgrades.)
Facebook Rocks Wall Street With Q2 Report
Earlier this week, Facebook rocked Wall Street when it reported active users for the quarter that were weaker-than-expected and warned revenue growth at the company would decline on a sequential basis during the second half of this year. For the second quarter, it said it has 2.23 billion monthly users, which marks an 11% increase but was lower than Wall Street’s expectations of 2.25 billion users. User growth on a monthly and daily basis was flat in the U.S and down slightly in Europe compared to a year-ago. (See more: Is Facebook Too Big for Our Own Good?)
It’s too early to tell if the numbers reflect a new reality for Facebook, but the U.S. and Europe generate more than 70% of the company's revenue while representing fewer than one-third of daily active users, noted the Wall Street Journal.
In Europe, Facebook and other internet companies have to contend with the General Data Protection Regulation, which is a legal framework put together by the European Union that seeks to enhance transparency on how internet companies use customers’ data. In late June, California passed a new digital privacy law that is one of the strictest in the country, giving consumers the right to know what information companies are collecting, what they are doing with it and who they are sharing it with. Customers also have the right to tell companies to get rid of information on them and to not share their data with third parties.
If the slowdown in users continues, investors could be in for more Facebook pain. The paper pointed to UBS analyst Eric Sheridan who downgraded Facebook to neutral this week. He said that when Alphabet’s (GOOG ) came under pressure in regards to growth from 2010 through 2013 the stock remained below twenty times earnings for much of that period.