Facebook Shares Sink; Further Growth Drops Expected

Fredrick Soto
July 28, 2018

After falling overnight on Wednesday, Facebook shares were down as much as 19.6pc at $174.78 each in early trading yesterday in the United States, a decline that would wipe about $124bn off the company's value - or almost four times the entire market capitalisation of Twitter. The EU's new privacy law, the General Data Protection Regulation (GDPR), is thought to have contributed to a loss of three million Facebook users in Europe.

Previously, since the announcement of the Cambridge Analytica debacle earlier this year, Facebook's stock price had fallen, but had since more than recovered.

That "bombshell", as one analyst termed it, played into concerns on Wall Street that Facebook's model could be under threat after a year that has been dominated by efforts to head off concerns over privacy and its role in global news flow.

The firm said it had 2.23 billion monthly active users at the end of June, up 11% on June 2017, marking the slowest growth in more than two years. The company's sales grew at a 42% clip in the second quarter, so the forecast implies that its growth rate for the rest of the year will be 35% or less.

Speaking of market-leading tech stocks, Facebook's mega-cap counterparts Apple, Amazon, Netflix, and Alphabet all lost more than 1.5% at their overnight lows, and the Nasdaq 100 index dropped 1.4% in regular trading hours.

During the call, Facebook Chief Executive Mark Zuckerberg tried to recast the disappointing earnings.

Also alarming to investors: Facebook's growth is slowing with users in some of its most lucrative markets.

Some investors were also dismayed with Facebook's revelation about Instagram Stories, which allow users to post videos or photos that disappear after a day. But Facebook, which reported sales growth averaging 50 percent the past 10 quarters, may just be lowering the bar so it can win back confidence in future quarters. The CEO's own fortune lost $15.4 billion (€13.2 billion) of its value.

Specifically, Wieser says new European rules about company obligations to protect consumer privacy known as GDPR may prove to be expensive for the company in the long run.

No company has ever dropped that much in history.

"Looking beyond 2018, we anticipate that total expense growth will exceed revenue growth in 2019", he said.

And then there's an increased focus on privacy and security, something that Zuckerberg previously warned could harm the company's profitability.

"While those actions might take time to play out, it is still possible that threatened fines associated with GDPR to Facebook or other sellers of advertising could also have the effect of spooking advertisers into changing how they use data", said Wieser, who thinks the shares should be worth $140 USA - well below Thursday's level.

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