Facebook suffered the largest one-day loss in Wall Street history following Wednesday’s financial results for the first full quarter after Cambridge Analytica. Are users and investors unfriending Facebook because of the scandal? It’s not that simple.
What triggered the sell-off?
One word: Growth. Most companies would love to have the kind of financial results Facebook released after the market closed Wednesday. But investors have a different yardstick for fast-growing technology companies. In an earnings call with analysts, Facebook executives poured a bucket of ice-cold water on Wall Street expectations of fast revenue growth and fat profit margins which had propelled the stock to record highs. As a result, Facebook had its worst day in six years as a public company.
Is Facebook’s revenue growth slowing?
Yes. Revenue increased 42 percent year over year which, while impressive, is the slowest growth rate since 2015. Facebook also missed Wall Street revenue estimates for the first time in three years.
Making matters worse, Facebook warned that growth rates would decline for the rest of the year. Analysts were blindsided. “Many investors are having a hard time reconciling that deceleration,” Jefferies analyst Brent Thill told Facebook executives on the earnings call.
So is the Cambridge Analytica scandal to blame?
Partly. People’s feelings about Facebook soured after the company admitted that as many as 87 million people had their personal information improperly obtained by Cambridge Analytica, a firm with ties to the Trump campaign. Even so, the stock had surged since the scandal broke in March, closing at a record $217.50 Wednesday before Facebook released its second-quarter financial results, the first full quarter since the scandal broke.
But the results left no doubt that Cambridge Analytica and a barrage of other scandals have taken a serious toll, from the ongoing investigations into Russian manipulation of Facebook during the 2016 presidential election and relentless criticism over the spread of misinformation on Facebook, particularly in countries such as Myanmar and Sri Lanka where that misinformation has exacted a deadly toll.
Is Facebook now paying for all these scandals?
Yes. Wall Street was troubled by the rising costs of operating the business are outpacing revenue growth. Some of that is from hiring a lot of workers, in part to combat problems on Facebook, including foreign election manipulation. It’s also investing in video content, artificial intelligence and virtual reality. The Menlo Park, California company had 30,275 people on the payroll as of June 30. That’s a 47 percent increase from a year ago.
Are people using Facebook less?
It looks that way, though Facebook would say that’s by design.
Facebook is so massive, 2.23 billion people use it every month, that it can’t keep growing like a weed forever. But investors were unprepared for the figures Facebook released Wednesday which showed that people are not hanging out on Facebook as much.
Facebook posted the slowest growth rates to date in the number of people who use Facebook once a month and once a day. Also, growth flatlined in Facebook’s biggest market, the U.S. and Canada, where it has 185 million daily users, and declined 1 percent in Europe where it has 279 million daily users.
Even before Cambridge Analytica, USA TODAY surveyed dozens of social media users and many of them said they started spending less time on Facebook after the bitterly divisive presidential election.
But Facebook’s growth had to slow down sometime. Many of the people who use the Internet the world over are already on Facebook. The other factor that hurt Facebook in the second quarter: Europe implemented strict new data laws which Facebook says led to fewer daily visits from that region.
Could this be good for Facebook users and Facebook?
What investors see as downside could benefit Facebook users and Facebook in the long run. Facebook has gotten a bad rap for being too lax in safeguarding people’s private information, failing to monitor and stop bad behavior on the platform and for letting misinformation run amok. Now it’s owning up to those problems and it’s spending a lot of money to fix them. Facebook also said Wednesday that part of the reason revenue growth will slow is that Facebook is giving its users greater control over the privacy of their data, undercutting Facebook’s ad targeting capabilities.
I own Facebook shares. Is there a silver lining?
Yes, just ask Facebook. That silver lining is Facebook’s other apps: Instagram, Facebook Messenger and WhatsApp. Facebook is counting on on these three apps which each has more than 1 billion users to drive future growth. CEO Mark Zuckerberg hammered that point during the conference call with analysts with a big stat: 2.5 billion people use at least one of Facebook’s apps every day.
Instagram, in particular, is a bright spot. Facebook does not break out Instagram’s revenue, but analysts believe it contributed significantly to second-quarter revenue. During the earnings call, Zuckerberg called the acquisition of Instagram “amazing” and said Instagram has grown twice as fast as it would have by being part of Facebook. He did not explain how he reached that conclusion.
“The company is still growing users, and although the Facebook platform is beginning to see slowing growth, the company’s other products are still seeing dramatic growth,” Wedbush Securities analyst Michael Pachter wrote in a research note.
It’s important to remember, too, that Facebook remains one of the top players in digital advertising, particularly mobile advertising, second only to Google. Mobile advertising made up 91 percent of Facebook’s advertising revenue in the second quarter, up from 87 percent a year ago.
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