It has been a turbulent 24 hours for Facebook (NASDAQ:FB) and its investors. In anticipation of the company’s Q2 earnings report, Facebook stock hit record highs on Wednesday.
After the results came in, things got ugly. With the company failing to meet expectations for user growth and a warning that revenue will take a big hit for the next several years as the company struggles to address ongoing privacy concerns, Facebook stock tanked in after hours trading, dropping as much as 24% at one point.
In two hours, the company lost nearly $123 billion in market cap, and CEO Mark Zuckerberg’s personal loses during that time of $16.8 billion were heavy enough to knock him down several places on Bloomberg’s billionaires Index.
Facebook Reports Q2 Earnings
Facebook delivered its Q2 2018 earnings report yesterday evening, and at first glance, there were some decent numbers. EPS of $1.74 were up 32% compared to last year, and beat the $1.72 Wall Street was expecting. Revenue of $13.23 billion just missed the expectations of $13.36 billion, but it was up 42% year-over-year.
Those kind of numbers wouldn’t be expected to cause Facebook stock to plummet. They may not warrant the record highs at which the company was trading Wednesday, but what happened in after hours trading was much more than a minor correction.
There were two big problems that spooked investors: the cost of ongoing privacy issues and warnings of a big slowdown in revenue growth. In many ways, the two are are connected.
Once of the big news stories of the past year has been Facebook’s ongoing struggle with privacy issues. Accused of everything from influencing the election to targeted advertising and accusations of improperly sharing user data, FB has been under fire.
The company is facing increased regulatory scrutiny worldwide over its privacy policies. Addressing these concerns is going to be expensive.
The company is facing slowing new user growth and slowing active users. Worldwide, the company added just 22 million new users in the quarter, its lowest since 2011.
In the U.S. and Canada, growth was flat and it actually declined in Europe, and these are FB’s most lucrative markets. Growth in numbers for daily active users (DAU) and monthly active users (MAU) both slowed, and missed estimates.
As The Verge points out, these numbers not only reflect the fact that Facebook is running out of new users to sign up, but they also show the impact of the privacy scandals. Slowing user growth, combined with having to back off on targeted advertising means slowing revenue growth.
Like other U.S. tech companies including Apple (NASDAQ:AAPL), Facebook has looked to China as a source of new customers, but is finding it difficult sledding.
Addressing the privacy issues is going to be costly and Facebook CFO David Wehner offered revenue guidance that hits home in terms of just how expensive it will be. He told investors that the company’s profit margin, which already fell this quarter from 47% to 42%, would sink to the “mid-30s” for more than two years.
When you look at the ongoing cost of the privacy issues and the specter of user growth slowing, the reaction to punish Facebook stock makes a lot more sense.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.