Facebook shares closed at $217.50 apiece Wednesday, prior to the company’s release of its second-quarter 2018 earnings. And those earnings were seemingly brimming with good news: Revenue was up 42 percent year-over-year, net income rose 31 percent and both daily and monthly users climbed 11 percent over the same time period.
So why did Facebook’s stock plunge as much as 24 percent in after-hours trading before opening at $174.89 Thursday, down 19.6 percent, causing the company’s market capitalization to fall from $629.6 billion to $506.2 billion?
Things didn’t get much better over the course of the week, as Facebook closed at $176.26 Thursday and opened Friday trading at $179.87 per share.
The doom and gloom extended beyond Wall Street, as an advertiser at a Fortune 100 brand said, “Facebook is becoming a platform of last resort not for any one reason, but for the steady drip, drip, drip of problems that, in totality, give you a whiff that there may be a governance or leadership shortfall there.
This has to give a prudent advertiser pause when considering where to invest advertising dollars and not knowing where the next instance of those shortfalls will manifest itself and not wanting to get caught up in the middle of that. It’s death by a thousand paper cuts.”
An easy answer would be the Cambridge Analytica scandal and the other various privacy issues Facebook has been dealing with, but those have been ongoing for months, and nothing happened on those fronts Wednesday to cause Wall Street to react.
Cheddar senior reporter Alex Heath agreed:
Periscope vice president of media Jen Brady thinks Facebook may have just been overvalued, adding, “It’s just a shake in the market. It’s almost like a wake-up call, too.”
An agency executive who asked not to be named feels that Facebook “got to a point where they got too big for their britches,” adding, “I’ve always been frustrated that the biggest player in the game is the most difficult to work with. Like any other platform, they cater to brands that spend more money—better reps, better creative shot services. When you’re not spending as much, you don’t have access to the same level of service. Facebook is not as hungry as Pinterest, or Snapchat, or some of the other players that really want you to come and spend with them.”
However, despite times when the temptation to move spending elsewhere became strong, “It’s completely impossible to avoid Facebook because of its massive reach,” that executive said.
On the revenue front, CFO David Wehner cautioned that the company expects a decline in the high single-digits percentage-wise over the next couple of quarters, citing currency exchange rates and the costs of growing Stories, complying with the European Union’s General Data Protection Regulation and giving users more privacy controls.
A second agency executive who wished to remain off the record said GDPR was already having an impact, noting that when some of the agency’s clients went dark for a bit during the period when the regulations were being implemented, “we lost some of our credibility within Facebook’s system,” and adding, “Facebook has been a little bit of a struggle, but the problem is that it’s just one of those beasts that you have to deal with. It’s one of those evolve-or-die situations, and Facebook is choosing to evolve in ways that are detrimental to advertisers. It’s making it really tough for us to invest dollars there.”
While Facebook’s user growth was strong year-over-year, comparing it with the first quarter of 2018 changes the picture, as the social network’s monthly user total of 2.234 billion was up just 1.54 percent and its daily user count of 1.471 billion crept up just 1.44 percent.
The company tried to gloss over this trend by debuting a new metric, family of applications audience, and noting that 2.5 billion people each month use at least one of its apps: Facebook, Messenger, Instagram or WhatsApp.
User growth trends were also alarming in the two highest markets for Facebook in terms of average revenue per user: Monthly users were flat in the U.S. and Canada, where ARPU is $25.91, and down slightly in Europe ($8.76 ARPU).
The lack of growth in the U.S. should not have come as a surprise, as Pew Research Center reported earlier this year that 68 percent of adults in the U.S. use Facebook, which was unchanged since 2016.
Wehner mentioned GDPR in his opening remarks but cautioned that it was only in effect for the final month of the second quarter, and its impact could be felt in future quarters.
COO Sheryl Sandberg chimed in, “As we look further out, we recognize that there’s still risk, and we’re going to watch closely. Advertisers are still adapting to the changes, so it’s early to know the longer-term impact. And things like GDPR and other privacy changes that may happen from us or may happen with regulation could make ads more relevant.”
The first executive said brands have expressed concerns over Facebook’s many privacy issues, saying, “What does this mean? Are we in trouble? Are we susceptible now because Facebook was doing things we didn’t even know about with data? There is a juxtaposition of brands losing trust because they’re not sure how Facebook is leveraging data.”
Finally, on Facebook’s shift to Stories, Wehner conceded that the feature currently has “lower levels of monetization,” and that the social network plans “to build out more products on the demand side for Stories.”
Sandberg added, “The question is: Will this monetize at the same rate as News Feed? And we honestly don’t know—we’ll have to see what happens. There are good reasons to be very optimistic about the monetization. The opportunity—full-screen, authentic, very engaging, different formats than News Feed—gives us an opportunity to grow. We also don’t have all of our advertisers creating Story ads yet. Obviously as more and more advertisers come in and do that, the more and the better ads we’ll have.”
Brady believes Facebook Stories is a case of “trying to go to market so fast before figuring out the details and trying to get ahead of the next tech company.”
The second agency executive who asked not to be named predicted that Facebook will figure out a way to better combine the Stories experience with the Messenger experience, likely taking inspiration from Snapchat again, and added, “Both Facebook and Instagram have a long way to go in terms of keeping up with the younger generations—even younger than Generation Z—in terms of how they’re using Stories.”