Facebook could face billion-dollar fine, Wall Street analysts say

Facebook makes privacy changes

Facebook (FB) could be staring down the barrel of the biggest ever fine by the Federal Trade Commission. 

Wall Street analysts who follow the social-media giant say the agency, which announced Monday that it has launched an investigation into the company's data privacy practices, could hit Facebook with a financial penalty of up to $2 billion. 

The heaviest fine to date by the consumer watchdog came in 2015, when LifeLock, a maker of ID theft protection technology, had to pay $100 million after violating the terms of a previous FTC order. 

Wedbush Securities analyst Michael Pachter expects the agency fine Facebook $1 billion to $2 billion. That amount would "be meaningful enough to wake Facebook up and make sure that they fixed this," he said. 

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But the bigger concern is that tighter federal regulation on Facebook, and possibly other internet players, could hurt the company's advertising business. "Investors are concerned that regulators may overreach and may say, 'OK Facebook, you have to limit everybody's access to data'."

Any new regulatory constraints placed on how Facebook handles people's data could hinder its functionality by, among other things, making it harder to search. That could hurt the social network's "engagement," a key internet industry metric related to how long users stay on a site, and make Facebook less valuable to advertisers, Pachter said.

Stephanie Miller, an analyst at Height Capital, also expects a fine in that range, noting that the FTC has previously fined companies as much as 20 percent of their annual revenues. Facebook had revenue of $40 billion last year, so that would amount to a fine of $8 billion. 

Miller thinks the agency is unlikely to impose such a heavy fine. "Rather, we think the FTC will choose something with a 'billion' handle on it and will keep that figure in the low single digits," Miller wrote in a note to clients.

The FTC's probe into Facebook is expected to take months. One possible hitch: The Senate has yet to confirm four nominees to the five-member panel. Acting Chairman Maureen Ohlhausen and commissioner Terrell McSweeny are expected to leave the commission when the Senate confirms the nominees, according to Bloomberg

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Despite Facebook's travails, and even with its shares slipping more than 11 percent this week amid mounting scrutiny of the company, many Wall Street analysts remain bullish on the company's prospects.

Wrote Morningstar analyst Ali Mogharabi in a note on Wednesday: "[W]e remain confident that the company can endure the short-term impact of the data breach. At this point, we do not expect a significant long-term negative effect on Facebook's platform and operations." 

And while noting the regulatory risks facing Facebook, Pachter's 12-month price target on the company's shares is $260, well above the share's current value of $158.