A Blog by Jonathan Low


Jul 26, 2018

Was Facebook's Stock Price Crash An Anomaly - Or Reflection of Its New Reality?

$151 billion in market cap lost in an afternoon. Yep, that's what they call real money.

The thing about companies like Facebook  - or Uber a year ago, or Microsoft back in the day - is that they are unbeatable and indestructible - until they're not. The problems highlighted in yesterday's call with analysts about financial results have been there for a while: market penetration, slowing user growth, rising costs tied, in part, to its need to better police itself and repair its reputation for chronic abuse of personal information.

But the bigger issue may just be the law of big numbers: you can only grow so far, so fast before the reality of demographics and market saturation  - and the financial implications that entails - catches up with you. JL

Shira Ovide reports in Bloomberg:

After the release of  financial results, its shares dropped 24%. If what the company predicts comes to pass, the internet’s best combination of revenue growth and plump margins is dead. There’s a ceiling to Facebook’s growth now that many of the world’s internet users are already on it. Years of bad headlines, and distaste for using the social network, are softening user numbers. Changes to make Facebook less riddled with misinformation, more attuned to newer trends, and less creepy about user information may result in  revenue, profits and user growth running out of steam
Facebook Inc. hasn’t been able to do anything right — except when it comes to making money, where it could do nothing wrong.
That changed on Wednesday, when the company posted disappointing growth in revenue, profits and the number of visitors to its digital hangouts. Results are still stellar by the standards of most companies, but investors in fast-growing technology companies react badly when their high hopes aren’t met, as Netflix recently found out. Facebook hit a record stock price on Wednesday, but after the release of its financial results, its shares dropped a stunning 24 percent in after-hours trading.
And no wonder. The company’s financial results, and especially its glimpse into a more pessimistic financial future, were utter disaster for investors. If what the company predicts comes to pass, the internet’s best combination of fast revenue growth and plump profit margins is dead. All at once, it seemed, reality finally caught up to Facebook.

The company has spent the last two years in near-constant crises about election interference on its social network, lax oversight of users’ digital information, the viral spread of misinformation, and incitements to violence. Those crises were made worse by Facebook’s inability to police itself and its failures to explain how and why it does what it does. But in Facebook’s short life, it has been adept at two things: figuring out what people want to do on the internet, and coming up with inventive ways to let companies pay for the privilege of digitally interacting with them.
The second-quarter results could be a blip, but there were plenty of red flags that Facebook is finding it tougher to deliver on both of its strong suits.
Revenue rose 42 percent from a year earlier. Again, that’s heady by the standards of most companies, but it was the slowest growth rate since 2015 and the first time in three years that Facebook fell short of analysts’ average revenue estimates. Rising costs were another concern. Expenses to operate Facebook’s computer systems, hire engineering employees and more rose to the point where its operating costs increased faster than revenue. That’s not something investors are used to seeing from Facebook.
Executives said expense growth will continue to outpace a much slower pace of sales growth.