Meta Faces Mounting Fines Amidst Strong Revenue Growth. Platforms (META.O)might seem in a position of unassailable strength. The $1.2 trillion Facebook parent grew revenue by 22% year-over-year in the second quarter to $39 billion, almost twice the rate of top-line expansion at Alphabet (GOOGL.O). However, this impressive growth is driven more by monetization of existing users than by adding new ones. Despite the strong financials, several challenges loom on the horizon.

In the three months ending June, growth in two key metrics for the endurance of a social network—engaged users and ad impressions—slowed. Daily active people across platforms like Facebook and Instagram remained nearly flat compared to the previous quarter. The growth in ad impressions also decelerated to a third of the rate seen last year. Despite this, the average price per ad increased by 10%, and operating margins improved by 9 percentage points to 38%. Consequently, net income surged by 73% to over $13 billion.

Keeping the engine of improved ad targeting running smoothly necessitates extensive data collection. Regulators, however, are increasingly vigilant and ready to impose penalties for any perceived overreach. This week, Meta agreed to pay the state of Texas $1.4 billion to settle accusations of illegal use of facial-recognition technology, though it denied any wrongdoing. Last week, Reuters reported that the European Commission could impose a $13 billion fine over alleged unfair advertising practices. In 2019, the U.S. Federal Trade Commission imposed a record $5 billion fine for data misuse.

While these fines might seem manageable for Meta given its scale—profit estimates for 2024 and 2025 combined. Are projectd to top $110 billion—continuou backlash could have a compounding effect. Other industries, like banking, also face similar penalties, with Goldman Sachs (GS.N) having paid billions in fines. However, the intensity of scrutiny on Meta is particularly pronouncd. With regulators focusng on CEO Mark Zuckerberg from multiple fronts.

Reports from the Wall Street Journal indicate that ads on Meta’s platforms have led users to sellers of illegal drugs, including cocaine and opioids. Federal authorities are now investigating Meta’s involvement in the sale of narcotics. In response to Breakingviews, Meta stated its business is “strong because advertisers use our services to grow and thrive.” A spokesperson added, “We have strict rules about the type of content that can be advertised on our platforms, and we reject hundreds of thousands of ads for violating our policies.” Nevertheless, investors might eventually react negatively to the recurring fines.

CONTEXT NEWS

Meta Platforms’ second-quarter revenue rose by 22% year-over-year to $39.1 billion, exceeding expectations. Daily active people increased slightly from the last quarter to 3.27 billion, the company reported on July 31. On the same day, the Wall Street Journal published an article stating that Meta Platforms’ networks. Facebook and Instagram, had run ads directing users to buy illegal drugs such as cocaine and opioids. In response, Meta asserted that its systems are designed to proactively detect and enforce against violating content. And it rejects hundreds of thousands of ads that breach its drug policies.

Additionally, Meta Platforms agreed to pay $1.4 billion to Texas to resolve the state’s lawsuit, which accused the company of illegally using facial-recognition technology to collect biometric data of millions of Texans without their consent. The settlement was disclosd on July 30.

CONCLUSION

As Meta continues to grow its revenue and profit, the company faces increasing scrutiny and penalties from regulators worldwide. While it manages to absorb these fines currently, the ongoing backlash and potential for further regulatory actions could impact its long-term stability and investor confidence.