Facebook stock (FB) stock plummeted by more than 20% after an earnings report was released.
During the regular trading hours, Facebook has actually closed the day with a positive +1.32% however when markets were closed, the earnings report missed expectations on revenues and showed signs of slowing user growth. All this resulted in a loss of more than 20% during the after-hour sessions as around 34 million shares changed hands. This is way above the average volume of 17 million shares during a regular trading session over the past month.
When the regular session closed on Wednesday night, Facebook stock was trading at $217.50 but fell to around $172 after the earnings call. Should the losses hold into Thursday’s regular session, Facebook would lose more than $100 billion in market capitalization and lose the stock’s gains for the year thus far.
What were the causes of this huge decline?
Slower user growth rate
During Q2, Facebook’s monthly user count grew just by 1.54% compared to 3.14% last quarter where’s daily active users grew even at a slower pace at 1.44%, compared to 3.42% last quarter. The majority of user count decline came from Europe and North America (see below chart).
GDPR (General Data Protection Regulation)
Throughout the second quarter, Europe introduced the GDPR that forced companies like Facebook to change its privacy policies. David Wehner, the firms Chief Financial Officer blamed GDPR for Facebook loss of users in Europe. That law and Facebook's Cambridge Analytica scandal led the company to have to improve its privacy controls and thus make it tougher to target people with ads or show their content to more people.
David Wehner explained that revenue-growth slowdown is expected to continue. Profits were up 41.9% from a year ago but this was lower from what the analyst had predicted. Wehner continued to explain that ‘In terms of what’s driving the deceleration, it’s a combination of factors. First of all there’s currency that’s going from a tailwind to a modest headwind. Secondly, we’re going to be focusing on growing new experiences like Stories . . . and that’s going to have a negative impact on revenue growth. And we’re giving people who use the service more choice in terms of privacy.”
Expenses for this quarter increased to $7.4 bn, which is over 50% compared to last year and according to Wehner will continue to increase for the rest of 2018.
Summary of the missed estimates:
• Earnings per share: $1.74 vs. $1.72 per a Thomson Reuters consensus estimate
• Revenue: $13.23 billion vs. $13.36 billion per a Thomson Reuters consensus estimate
• Global daily active users (DAUs): 1.47 billion vs. 1.49 billion, according to a StreetAccount and FactSet estimate
• North American DAUs: 185 million vs. 185.4 million, according to a FactSet estimate
• European DAUs: 279 million vs. 279.4 million, according to a FactSet estimate
• Average revenue per user (ARPU): $5.97 vs. $5.95, according to a StreetAccount and FactSet estimate
Is this an opportunity for investment or should we stay away?
As we all remember, back in March when the Cambridge Analytica scandal emerged, the stock price declined heavily (c. 21%) from the previous highs in a matter of days and that surely represented a good opportunity for investment.
Furthermore, although the GDPR rules in Europe are putting more cost pressure on Facebook, over the longer term this law will be positive as it creates more barriers for new start-up tech firms to enter the social media market and hence strengthen the position for Facebook.
We don’t need to forget that Facebook also owns Instagram which has seen a rapid increase in the usage (from 600 million to 1 billion new active users). It is expected that Instagram will contribute to around 18% of the group’s revenues in 2018.