It survived the Cambridge Analytica mess. It absorbed the rollout of GDPR. It even weathered the announcement that Facebook would hire 20,000 workers to fight fake news and otherwise improve the platform’s safety and security. Facebook’s stock took all those punches in stride, but it couldn’t handle a disappointing earnings call last Wednesday.
As the market now knows, that’s when the floor dropped out from beneath FB. The stock lost 7 percent of its value as soon as the second-quarter numbers came out, then continued its descent during the conference call. Between the time the market closed and Mark Zuckerberg answered the last analyst question, Facebook had bled $120 billion in market capitalization – 20 percent of the company’s value. Facebook’s dramatic losses led a retreat among the entire group of so-called FAANG stocks (Facebook, Apple, Amazon, Google, and Netflix) and, indeed, the entire tech sector. NASDAQ just closed at its lowest level in more than three weeks.
But what sparked the losses in the first place? There are any number of potential causes, with reporters pointing to missed expectations on revenue, slowing user growth and weak guidance. None of those sound like mortal sins, and in fact Facebook had some positive news mixed in: 50 percent year-over-year growth in mobile revenue, and a beating of analyst expectations on net income.
For more insight, we went back to the Intelligize platform and reviewed the transcript of the fateful earnings call. Let’s look at the ten most consequential statements from that call:
1) “Total expenses were $7.4 billion, up 50 percent.” – David Wehner, CFO
These stark numbers from CFO Wehner indicate just how many resources Facebook is putting into its effort to combat fake news and other negative aspects of life on social media. This is putting a drain on profits, and as such has to be considered a big part of the equation in the stock’s decline. Not to mention . . .
2) “We ended Q2 with over 30,000 full-time employees, up 47% compared to last year.” – Wehner
The massive additions to Facebook’s workforce have been driven by its laudable goals to address issues like election integrity and privacy controls, but in the short term they may be adding to the weight on the stock.
3) “Our total revenue growth rates will continue to decelerate in the second half of 2018, and we expect our revenue growth rates to decline by high-single digit percentages from prior quarters sequentially in both Q3 and Q4.” – Wehner
If you’re looking for the line that did the most damage, this could be it. As Marketwatch noted: “The stock didn’t fall off a cliff until Chief Financial Officer David Wehner disclosed that the social-media giant expects the revenue-growth slowdown to continue.”
4) “Looking beyond 2018, we anticipate that total expense growth will exceed revenue growth in 2019.”
In some ways, this is the most negative statement of all – a clear indication that Wehner doesn’t see relief from the profit pressures until 2020. This statement came at the end of Wehner’s opening remarks.
5) “The quick answer is that we’re not planning on going in to the cloud services [business].” – Mark Zuckerberg, CEO
A question toward the end of the call asked if Facebook could try to wring more revenue out of their company-owned data centers. With this answer, Zuckerberg shut down any speculation that the company would be competing in the cloud services space.
6) “GDPR has not had a revenue impact, but we also recognize it wasn’t fully rolled out this quarter.” – Sheryl Sandberg, COO
The Facebook messaging was not 100 percent clear on GDPR. Sandberg said that it had no revenue impact, but then . . .
7) “GDPR caus[ed] sort of faster deceleration than in the other regions.” – Wehner
Wehner suggested that GDPR contributed to decelerating growth in Europe. They did their best to clean it up later but squaring the two statements is a bit of a challenge.
8) “We’re going to be focusing on growing engaging new experiences like Stories and promoting those. And that’s going to have a negative impact on revenue growth.” – Wehner
The market may not have liked them, but Facebook had multiple explanations for the slowdown in its revenue growth. One was the increase in privacy controls. Another was the fact that it is driving people to Stories (videos on Instagram), which are not as thoroughly monetized as other areas. Optimists can see opportunity for some real long-term gains here, even as the stock drops in the near-term.
9) “We’re much more confident that we’re going to get this right for the elections in the 2018, which include the U.S. midterms.” – Zuckerberg
Zuckerberg closed the call on a confident note about Facebook’s ability to minimize the impact of fake accounts and other misuses of the platform in connection with worldwide elections. He pointed to Facebook’s success in handling interference in the Alabama special election and the recent Mexican election.
10) “It’s over a timeframe more than two years is our expectation.” – Wehner
The “it” that Wehner referred to is the length of time that Facebook will experience a lower operating margin. This answer made it clear that it won’t be over anytime soon.