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Facebook's luck may soon run out

Facebook (FB) is facing a $3 billion to $5 billion fine from the Federal Trade Commission related to its handling of user data and the Cambridge Analytica scandal. But that doesn’t seem to matter much to investors. Following the company’s Q1 2019 earnings call on Wednesday during which the social networking giant announced it is preparing for the fine, Facebook’s stock was up in early trading on Thursday.

On top of that, analysts who follow the firm have either increased their price target or raised Facebook’s stock rating to a buy.

At this point, it looks as though Facebook can do no wrong that will adversely impact investors’ view of the company. But with regulators from Europe setting their sights on the tech firm, and Congress preparing some form of privacy legislation, Facebook’s fine might not be the last.

Add to that continued increase in European users who are opting out of allowing websites and apps to track their information for use in targeted advertising due to Europe’s General Data Privacy Regulation, and Facebook could be facing some serious problems in the future.

What’s $3 billion or more in fines anyway?

Facebook’s announcement that it could be facing upwards of $5 billion in fines came via a single paragraph in its earnings report. In a statement the company said:

“In the first quarter of 2019, we reasonably estimated a probable loss and recorded an accrual of $3 billion in connection with the inquiry of the FTC into our platform and user data practices, which accrual is included in accrued expenses and other current liabilities on our condensed consolidated balance sheet.”

In other words, Facebook set aside $3 billion in the last quarter with the expectation that it will have to pay out at least that amount to the FTC. The fine relates to the Facebook’s 2018 Cambridge Analytica debacle, which saw a political consultancy firm use Facebook user data to aid in Donald Trump’s campaign for president.

Investors, however, were glad to see that Facebook’s user numbers increased in certain regions including in Europe, the Asia Pacific region, and what the company calls “rest of the world.” User numbers in the U.S. and Canada remained flat.

But the fact that Facebook’s user numbers were up and, outside of that little $3 billion charge, it met expectations for revenue and earnings per share, were positive signs for the business.

“While concerns will persist about core Facebook maturation, regulatory headwinds and/or safeguarding the platform for a privacy first approach, we think the market now better understands many of those risks (as they dominate almost all of our investor conversations),” UBS analysts Eric Sheridan and Alexandra Steiger wrote in an analyst note indicating they raised Facebook’s stock rating to a buy.

Credit Suisse analysts Stephen Ju, Nicole D’Souza, Philip Wang and Yoni Yadgaran, meanwhile, increased Facebook’s price target from $211 to $235. In their estimation regulatory activity that will negatively impact Facebook will likely hurt similar companies like Google, so advertisers, looking for the best return on investment, are best equipped to gain advertiser market share rather than lose it.

Regulators aren’t done with Facebook yet

Facebook’s potential FTC fine may top out at $5 billion, but it’s not the only regulatory issue the company is facing. Ireland’s Data Protection Commission, which oversees Facebook’s privacy regulation for the European Union, has opened a new investigation into the company for its handling of user passwords.

The matter relates to the discovery that Facebook was storing user passwords in plain text on its internal servers. Storing the passwords in such a way made them easily readable by anyone with access to the server. Facebook initially said that the issue impacted tens of thousands of Instagram users, but revised that number to tens of millions of affected Instagram users. That was in addition to the hundreds of millions of Facebook Lite users’ passwords that were stored on the same server. Facebook Lite is a version of the social network originally designed for regions with slow or poor internet connections.

The Irish investigation is the 11th opened by the commission related to Facebook. If it comes down hard on the social networking giant, the commission could fine Facebook up to 4% of its annual global revenue under the E.U.’s GDPR. With the company earnings $55 billion in revenue in 2018 that would translate to $2.2 billion.

The U.S. is also working on privacy regulations related to the tech industry, but we’re still a way off from knowing what kind of fine structure companies could face. India and Brazil are also due to enact their own data and privacy regulations, which could directly impact Facebook’s operations, as well as those of other tech giants.

Still, with Facebook seemingly unable to avoid data scandal after data scandal, and the price of fines potentially reaching the billions of dollars, the company could start to take a serious hit to its bottom line. And when that happens, analysts and investors may finally start to take notice.

More from Dan:

Email Daniel Howley at dhowley@oath.com; follow him on Twitter at@DanielHowley. Follow Yahoo Finance on Facebook, Twitter, Instagram, andLinkedIn.finance.yahoo.com/


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