For Facebook, It's Time to Pay the Piper

This post was originally published on this site

Over the past year, it seemed like Facebook (NASDAQ:FB) was made of Teflon, and nothing would stick. The market seemed to brush off the data scandal that led to U.S. election interference, Congressional hearings, and a 500,000-pound fine (about $655,000 at current exchange rates) levied by British authorities who said that the social-media maven failed to protect user data.

In spite of a brief dip acknowledging its troubles, Facebook shares continued to rise, recently reaching all-time highs. Going into the company’s second-quarter financial report, it seemed nothing was going to stop its relentless climb. Then the bottom dropped out — and the stock fell nearly 20%.

The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$13.23 billion

$9.32 billion

42%

Operating margin

44%

47%

(300 basis points)

Net income

$5.11 billion

$3.89 billion

31%

Diluted earnings per share

$1.74

$1.32

32%

Data source: Facebook second-quarter financial release.

Facebook’s revenue grew to $13.04 billion, up 42% year over year, but missed analysts’ consensus estimates for the first time in over three years, which called for revenue of $13.34 billion. While growth of that magnitude would be welcomed by most companies, it was a significant deceleration from the 50% year-over-year revenue growth that Facebook produced last quarter.

Slowing growth — that will get slower

Mobile advertising revenue grew to $11.9 billion, up 50% year over year, and now accounts for 91% of the total, up from 87% in the year-ago quarter. The average price per ad increased 17% compared to the prior-year quarter, while ad impressions grew 21%, driven primarily by ads placed in the feed on Instagram and Facebook. Average revenue per user globally grew to $5.97, up 26% over the prior-year quarter.

Facebook’s monthly active users (MAUs) climbed to 2.23 billion, while the number accessing the platform daily grew to 1.47 billion; both figures were up 11% compared to the prior-year quarter.

The company announced for the first time how many users accessed at least one of the company’s four apps — Facebook, WhatsApp, Instagram, or Messenger — each month, saying it amounted to 2.5 billion people.

“Our community and business continue to grow quickly,” said Mark Zuckerberg, Facebook’s founder and CEO. “We are committed to investing to keep people safe and secure, and to keep building meaningful new ways to help people connect.”

The Facebook thumbs-up logo on a street sign at the entrance to the company's campus

Image source: Facebook.

Looking ahead

Investors looking to understand the severity of the stock’s plummet need look no further than the guidance Facebook provided. On the second-quarter conference call, Facebook’s CFO Dave Wehner told shareholders what to expect:

Our total revenue growth rate decelerated approximately 7 percentage points in [the second quarter] compared to [the first quarter]. Our total revenue growth rates will continue to decelerate in the second half of 2018, and we expected our revenue growth rates to decline by high-single-digit percentages from prior quarters sequentially in both [the third and fourth quarters].

In explaining the forecast, Wehner said that the company expected currency headwinds to play a role, and that Facebook would be promoting “certain engaging experiences” that have lower monetization rates. He also said that giving users “more choices around data privacy” may adversely impact growth.

Given that the company grew revenue 50% year over year just last quarter, the specter of high-single-digit deceleration for the coming quarters sent investors running for the exits. If a decline of that magnitude actually materializes, things could get even worse.

Danny Vena owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

Most Popular Posts: