Facebook shares dive as growth stalls
Facebook’s scandals are finally hitting the company where it hurts: growth.
The social media company has contended for years with criticism about its content policies, its failure to safeguard private data and its changing rules for advertisers. Those problems hadn’t mattered to the success of the business — until now.
Facebook on Wednesday reported second-quarter sales and user growth that fell short of analysts’ projections. And the company told Wall Street the numbers won’t get any better this year.
Shares plunged after Chief Financial Officer David Wehner said revenue growth rates would decline in the third and fourth quarters. Analysts who follow Facebook were blindsided, asking frequently on a conference call with executives for more information on exactly how the company’s financial future had changed so dramatically.
“I think many investors are having a hard time reconciling that deceleration,” Brent Thill, an analyst at Jefferies LLC, told Facebook executives, asking for a little more clarity on the reasoning. “It just seems like the magnitude is beyond anything we’ve seen, especially across a number of the tech (companies) we cover.”
For Facebook, financial stumbles are rare. The last time the company missed revenue estimates was the first quarter of 2015. But the results followed a period in which data-privacy issues came under harsh scrutiny, with CEO Mark Zuckerberg testifying before Congress for hours on the company’s missteps. The quarter was also marked by Europe’s implementation of strict new data laws, which Facebook said led to fewer daily visitors in that region. The company was bombarded by public criticism over its content policies, especially in countries such as Myanmar and Sri Lanka where misinformation has led to violence. And it continued to suffer fallout from investigations into Russian manipulation of the platform during the 2016 presidential election.
All of those problems are hitting amid a harsh truth for the company: Facebook, the social network with 2.23 billion active monthly users, can’t grow forever. “The core Facebook platform is declining,” said Brian Wieser, an analyst at Pivotal Research Group.
Facebook said it had 1.47 billion daily active users in June, compared with the 1.48 billion average of analysts’ estimates compiled by Bloomberg. The company’s user base flatlined in its biggest market, the U.S. and Canada, at 185 million daily users, while declining 1 percent in Europe to 279 million daily users. Overall, average daily users increased 11 percent from the period a year earlier.
Revenue increased 42 percent to $13.2 billion in the quarter. Analysts projected $13.3 billion. The social network still holds one of the world’s most valuable sets of data on what people are interested in, and makes that audience easily available to advertisers. The company remains in a dominant position in mobile advertising alongside Alphabet Inc.’s Google.
“As we have written about extensively, the advertising industry — and digital advertising no less — has limits to growth, which we think is the primary factor constraining Facebook’s revenue opportunity,” Wieser said in a note after the earnings. “Deceleration such as management guided toward suggests that while the company is still growing at a fast clip, the days of 30%+ growth are numbered.”
Wehner gave three different reasons why the company’s revenue growth would decline: currency headwinds, greater investments in new kinds of content-sharing like disappearing videos, and greater user control over privacy — a direct response to criticism the company has fielded.