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US$1.4b hedge fund sees intact fundamentals for Facebook

Investors globally are uncertain about how exactly the regulators in the US and Europe will punish Facebook for misusing users' personal data.

New York

FACEBOOK Inc may be under global scrutiny amid a data breach scandal, but its fundamentals remain intact. Such is the thinking of Eric Bannasch, the founder of the US$1.4 billion hedge fund Cadian Capital Management. Facebook has lost 14 per cent since mid-March amid concern about how the company handles its users' personal data.

The selloff pushed the stock to trade at 18 times next year's earnings, a 25 per cent discount from its multiple in mid-January, data compiled by Bloomberg show.

Facebook and Google's parent Alphabet Inc have been under pressure since last year. Cadian Capital Management holds stakes in both companies, according to its latest 13F filing.

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The search engine is facing antitrust charges in Europe, while the social media giant is being questioned over its role in Russia's meddling of the 2016 presidential election. "Some of these things do create some dislocations and we do look at them," Mr Bannasch said in a phone interview.

"There is this regulatory question about what the governments of the world are going to try and end up doing to these companies, and we don't know the answers to that."

Despite an intense media scrutiny over privacy issues, advertisers are unlikely to leave Facebook en masse and the number of people deleting their accounts won't likely shatter the position of a social media platform that has two billion monthly users, according to Mr Bannasch.

Concern about extended valuation has also subsided with the selloff. But what worries Mr Bannasch is the regulatory response from the US and Europe to Facebook's mishandling of its users' personal data. "On a fundamental basis, not a lot has changed," Mr Bannasch said. "If people were leaving the platform because they were disgusted with getting targeted with advertising, then that might change the dynamic, but we are just not seeing that."

The hedge fund owns about 284,000 shares of Facebook, according to a fourth-quarter 13F filing. According to a person familiar with the matter, Cadian Capital Management returned 1.08 per cent net in March compared with a 2.5 per cent loss in the S&P 500 Index.

Facebook is about three weeks away from its first-quarter report. The company's revenue likely grew 42 per cent in the first quarter from the same time a year ago, according to an average of 34 analysts polled by Bloomberg.

"Twenty times (earnings) for 40 per cent growth is pretty darn cheap, but we would like it cheaper," Mr Bannasch said. Investors globally are uncertain about how exactly the regulators in the US and Europe will punish the company for misusing the users' personal data, but some might find answers in Mark Zuckerberg's testimony before the Congress this week. The odds that the US legislators will give users total control of their data is very low, according to Matthew Schettenhelm, a litigation analyst at Bloomberg Intelligence.

The so-called FAANG stocks are not the core of Cadian Capital Management's portfolio, which has a heavy exposure in the media, telecom and technology sectors and has positions in cybersecurity and healthcare stocks, 13F filings show.

Some of the stocks that the hedge fund holds include Palo Alto Networks Inc, Jazz Pharmaceuticals plc and Zendesk Inc, according to filings. Before founding Cadian Capital Management in 2007, Mr Bannasch was a managing partner at Richard Perry's Perry Capital hedge fund, where he oversaw investments in telecom, media and technology stocks. BLOOMBERG