Wall street stock market monitor showing Facebook cautioned after closing high Q4 earnings that privacy regulations will cut into profits going forward
Facebook Earnings Call Warns Investors That Privacy Regulations Will Cut Into Profits Going Forward by Scott Ikeda

Facebook Earnings Call Warns Investors That Privacy Regulations Will Cut Into Profits Going Forward

One would think Facebook would be riding high after Q4 earnings turned out to beat the Zacks consensus estimate, and posting record high stock prices to close out January. That wasn’t quite the tone of the latest earnings call, however, in which the company cautioned that revenue growth rates were expected to slow down somewhat in Q1 due to the cost of compliance with privacy regulations.

Facebook’s Q4 earnings reviewed

After a significant slump in October, Facebook’s market performance roared back to close out the Q4 earnings at historic highs that were in the neighborhood of the company’s mid-2018 peak. The company then proceeded to break those stock price records as the year turned over into 2020.

Facebook stock gained 56.6% overall in 2019, driven primarily by Wall Street perception that the company had managed to dodge any further serious fines and regulatory penalties after a disastrous 2018 headlined by the Cambridge Analytica scandal. That’s not to say that 2019 went entirely smoothly for Mark Zuckerberg’s company – Facebook remained relatively scandal-free until the company was assessed their record $5 billion fine in July, but then suffered several serious data breaches as well as questions about its ability to secure third-party apps and fact-check news stories. While there are signs that there may be serious internal issues at the company, none of this seemed to cause a ripple in the Q4 earnings.

Looming privacy regulations and expenses

That good quarter is now in the past, however. The future holds an increasing amount of privacy regulations that will, at the very least, cost the company significant money to comply with.

Facebook looked to downplay its strong Q4 earnings, warning that future quarterly reports would probably show reduced revenue growth. Part of the initial assessment included increased expenses due to operational changes mandated by the Cambridge Analytica decision. While the $5 billion fine (which Facebook paid over the first two quarters of 2019) is a very manageable amount for a company that has been pulling about $55 billion annually in revenue, that is not the final cost. Facebook is also required to implement improved privacy regulations and data security controls, more closely monitor third-party developers, and overhaul the upper levels of the company’s corporate structure. The company stated that it would need to put new technology in place and hire more staff to comply with all of these terms. Current compliance costs have already risen 66%, up to $12.3 billion annually.

In addition to the FTC’s new privacy regulations and settlement terms, the company is facing down the possibility of antitrust investigations. Though nothing concrete has been proposed yet, there have been rumblings that both the FTC and the Justice Department are gearing up to investigate tech giants such as Facebook, Google and Amazon. The Justice Department conducted an initial antitrust probe of these companies last summer.

The company also has concerns that its ability to deliver targeted ads will be compromised not just by new privacy regulations, but also by changes in the market. For example, the trend away from tracking cookies (led by Google’s announcement that Chrome will entirely abandon them within two years) would have a significant negative impact on Facebook’s ad business as it is presently composed.

The company has paid some significant civil penalties as well. Facebook recently paid a $550 million settlement involving its “Tag Suggestions” feature, a form of facial recognition technology. Facebook allegedly collected and stored biometric data, tagging and identifying millions of users in previously uploaded photos without their knowledge in violation of the Illinois Biometric Information Privacy Act. In October, Facebook also settled a $40 million suit with advertising agencies who claimed the company exaggerated its viewing time metrics.

As if all of that wasn’t enough, Facebook is facing the possibility of a heavy fine in the EU for GDPR violations in Ireland. A probe involving data protection rule breaches committed by Facebook-owned WhatsApp wrapped up in October, and could end up costing the company as much as $2.5 billion. Other international fines that Facebook absorbed in 2019 include $1.1 million from Italy (related to the Cambridge Analytica scandal), $2.3 million from Germany (due to underreporting of hate speech complaints), and $282,000 from Turkey (also related to Cambridge Analytica).

Is Facebook really in trouble?

At the moment, advertisers are not jumping off of the social media giant’s boat. Quite the opposite; the company added a million in the fourth quarter, up to eight million total. The new privacy regulations don’t appear to be scaring them off.

And in spite of word of the company hemorrhaging users throughout 2019 as a result of the privacy and “fake news” issues, the monthly active users count has actually been continuing to grow since the Q4 earnings report of 2017. Growth in America and Europe has been unremarkable during this period, but still on an upward trend; the majority of the company’s current growth is coming from the Asia-Pacific region and other parts of the world.

Facebook does not appear to be in any imminent danger, with the Q4 earnings report indicating that the company is expecting any decrease in growth to stay in the “mid single digit percentage” for the next quarter. This is only the beginning of new regulatory challenges for the company, however, as countries around the world continue to adopt tougher data privacy regulations.