Facebook shares are up more than 50 percent this year, but regulatory risk from crackdowns including fines and policy changes could cost the company almost 40 percent of its market value, according to HSBC Global Strategies.
“In a sense, Facebook’s sheer pace of growth is becoming a risk factor in its own right, as it is likely to accelerate scrutiny and intervention,” said Nicolas Cote-Colisson, an HSBC senior analyst, in a note to clients.
With a market cap of $565 billion, the Facebook valuation could see $225 billion evaporate as the social media giant increasingly intersects with regulators.
British investment bank HSBC initiated coverage of Facebook with a reduce rating, recommending investors sell the stock, CNBC reported.
“Regulatory overhang” is equivalent to 38.5 percent of the current Facebook valuation, said HSBC, which offers investment strategies and risk management across asset classes and global markets.
Potential threats to Facebook’s valuation include anti-competitive fines, privacy fines, taxes, trust-busting, merger control and telecoms-type regulation, the firm said.
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Facebook has been scrutinized by politicians and regulators all over the world. The Federal Trade Commission and the European Union have announced investigations into practices, digital competition and concerns about its proposed digital currency Libra.
Despite the regulatory overhang, Facebook shares are up more than 50 percent this year, CNBC reported. However, HSBC said due to the risk, growth will become more challenging.
“Although it has taken time for policymakers and regulators to ready their ideas, it should now be clear they have well-advanced plans for intrusive interventions,” Cote-Colisson said.
The average 12-month price target for Facebook on Wall Street is $238.28 per share, according to FactSet. HSBC lowered its 12-month price target for Facebook to $178 per share. Facebook’s stock closed at $198.71 on Wednesday.
Facebook will likely continue getting negative headlines, but that’s already priced into the stock, said Michael Olson, an analyst at Piper Jaffray. Olson initiated coverage of Facebook with an Outperform rating and $230 price target, according to Benzinga. The company should continue to dodge negative headlines and focus on leveraging its core business, Olsen predicted Tuesday.
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“Following a turbulent few years for Facebook, we believe the company has emerged well positioned and … along with evidence (in the form of recent quarterly results) that neither users or advertisers have abandoned Facebook properties, investors have taken a more optimistic view of FB shares,” Olson wrote in a note.
Online advertising is expected to account for 60 percent of global ad dollars spent within the next four years, and Facebook is one of the largest market share winners, according to Olson.
Olson pointed to Instagram Shopping and Facebook Market place — still in early stages of development — as opportunities for growth.