Facebook stock drops 20%-plus on nightmare earnings call

Facebook
CEO Mark Zuckerberg saw shares of his company’s stock plunge
after it reported earnings and discussed them with analysts
Wednesday.
REUTERS/Charles
Platiau/Pool

• Facebook stock dropped a whopping 24% after it
  announced its second quarter financial results on
  Wednesday.
• The plunge came after Facebook executives announced
  that the company expects a significant slowdown in its revenue
  growth in the years ahead.
• Here’s what happened during the disastrous conference
  call with analysts that saw Facebook value fall by as much as
  $148 billion.

Facebook CEO Mark Zuckerberg announced a new feel-good statistic
on a conference call with financial analysts on Wednesday: Some
2.5 billion people — a quarter of the world’s population — now
use at least one of Facebook’s products each month.

But that staggering statistic wasn’t enough to distract investors
from the bad news the company had to share — it expects
significantly decreased revenue growth rates and operating
margins in the years ahead.

The proof was in Facebook’s stock, which during the call was

down as much 24% from its price at the close of regular
trading. In fact, the call with Zuckerberg and his colleagues
only made things worse for Facebook, in terms of its share price.

An hour before the call started, Facebook announced disappointing
second quarter financial results. The company missed Wall
Street’s expectations on both revenues and its number of daily
and monthly active users.

Its stock fell more than 8% on that news. But it stayed
relatively steady after that, at least until the call
started and David Wehner, Facebook’s chief financial
officer, started discussing the company’s financial outlook.
Wehner warned that Facebook expected its revenue growth to 
slow from the 42% pace it posted in the second quarter and its
operating margins to fall from 44% in the period.

“Looking beyond 2018, we anticipate that total expense growth
will exceed revenue growth in 2019,” he said. “Over the next
several years, we would anticipate that our operating margins
will trend towards the mid-thirties on a percentage basis.”

Facebook’s stock really fell off during the company’s earnings
call

During the call, Facebook’s stock dropped precipitously. Within
minutes it was down 15%, then 18%, then more than 24%. At the
stock’s lowest point, more than $148 billion of the company’s
value — significantly more than the entire market cap of IBM
($134 billion) — had been wiped out.

Facebook’s shares rebounded later, but at the time of this
writing, they still remained deep in the red, at a little over
20% down.

Facebook’s
stock plummeted if after-hours trading. Here’s where it sits as
of writing.
Yahoo
Finance

Three key factors are driving Facebook’s expected revenue growth
decline, Wehner said. First, Facebook is battling currency
headwinds. Its overseas revenue got a boost in dollar terms as
the dollar appreciated against other currencies last year. But
the dollar’s decline this year will reduce the dollar value of
Facebook’s foreign revenue.

Second, the company is placing more emphasis on Stories, the
packages of posts and photos users can share with their friends
that generally disappear after 24 hours. The company doesn’t yet
make as much money from Stories as from its news feed and other
features on its site.

And then there’s an increased focus on privacy and security,
which Zuckerberg had previously warned could harm the company’s
profitability. New options that Facebook is offering users to opt
out of certain data collection — inspired in part by a new
privacy law in Europe — could lead to less advertising
revenue. 

Facebook’s expected decline “is beyond anything we’ve seen”

As analysts pounded Facebook executives on the call about the
company’s expected deterioration in its financial results, its
stock continued to sink. Towards the end of the call, a Jeffries
analyst seemed astonished at the scale of the growth slowdown,
saying it “seems the magnitude is beyond anything we’ve seen.”

Wehner warned analysts not to expect the company’s financial
results to get better anytime soon.

The company will likely be posting sub-par operating margins for
“several years … more than two, less than many,” he said.

It’s a staggering drop-off for Facebook, and flies in the face of
Wall Street’s expectations. Earlier in the day, its stock had hit
a new all-time-high of more than $218 a share. A few short hours
later, that already seems like a distant memory.