INVESTORS UNFRIEND FACEBOOK
TORONTO • has hit the reset button by attempting to shift the market’s expectations to more achievable levels.
The stock had risen more than 40 per cent off the lateMarch low that was caused by the Cambridge Analytica scandal. That compares to a gain of about nine per cent for the S&P 500, but Facebook shares plunged roughly 19 per cent on Thursday — a decline of more than $40 a share — after the company’s second-quarter results on Wednesday were accompanied by a surprisingly sober outlook.
Management cautioned that 2018 revenue growth will likely be slower than last year, and could fall as much as 10 per cent in the second half of 2018.
Facebook’s earnings per share of US$1.74 did beat the Street by two cents, but both sales and user figures fell short.
Investors were indeed disappointed by the social media giant’s shift but their reaction demonstrates that they were also shocked.
“We think few, if any, anticipated this kind of reset,” said Doug Anmuth at JPMorgan in New York.
While forex is partially responsible for Facebook’s revenue slowdown, Stories are also having a negative impact, as they are taking a larger potion of content sharing and time spend on the platform, but monetize at lower levels than on the News Feed.
Ads also have lower monetization levels on Facebook’s Instagram platform. However, management noted ad loads on Instagram is now comparable to Facebook, and ads in Instagram were partly responsible for the acceleration in impression growth to 21 per cent from eight per cent.
Data privacy is also taking a bite out of revenue, as is the EU’s General Data Protection Regulation, which Facebook said caused the loss of approximately one million monthly active users in the region.
“Facebook remains in the crosshairs of regulators and politicians, and data/privacy policies and products are just kicking in,” Anmuth said. “At the same time, we believe Facebook remains fully committed to improving safety and security on the platform, an expensive undertaking of ongoing spend with little to no direct or tangible return of revenue.”
The days of 30-per-centplus growth certainly seem numbered, although Facebook’s guidance does suggest growth will continue at a relatively fast rate.
“The advertising industry — and digital advertising no less — has limits to growth, which we think is the primary factor constraining Facebook’s revenue opportunity,” said Brian Wieser at Pivotal Research Group.
He is one of only two analysts (of the 48 tracked by Bloomberg) that rate Facebook shares a sell, and believes that commentary around high-single-digit deceleration for the next two quarters suggests investors need to bring down their expectations.
“Such a development should not be surprising given our view that digital advertising and advertising more generally has real limits to growth, although we recognize that most of the investment community has ignored this consideration, which we considered an inevitability, if one that might have been a little further off,” Wieser said.
Facebook’s revenue slowdown may prove to be a temporary issue, but some analysts seemed more concerned about the company’s margin outlook.
Following a long-term planning process, management trimmed its long-term operating margin guidance significantly to reflect ongoing data centre expansion, safety and security costs, and video content.
“The margin outlook is more discouraging if it’s realistic (less so if it’s overly cautious or political),” said Canaccord Genuity’s Michael Graham.
Eroding margins now seem to be at least partly reflected in Facebook’s share price, but unlike Netflix Inc., the firm’s quarterly shortfall doesn’t appear to be the result of temporary factors.
“Here we see an evolution of the story,” said Daniel Salmon at BMO Capital Markets. “So we remain on the sidelines until visibility on revenue deceleration improves.”
Investors seem to feel the same way.