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Facebook shares tumbled by more than 20% in after-hours trading on Wednesday after the social media network published Quarter 2 results, with revenue and user growth falling short of investor expectations.
Total expenses in the second quarter surged to $7.4 billion (£5.61bn), up 50 per cent compared with a year ago. Facebook had warned investors to expect a rise in costs due to efforts needed to address concerns about the Company’s inadequate handling of users’ privacy, following the Cambridge Analytica scandal and allegations of election interference. Rising staff numbers also contributed to the surge in total expenses with headcount rising 47 percent year over year, to 30,275 as of June 30.
The firm said it had 2.23 billion monthly active users at the end of June, up 11% on June 2017, the slowest growth in more than two years. Daily and monthly active users in Europe fell for the first time, to 279 million from 282 million and to 376 million from 377 million, respectively. In the US, the daily and monthly users remained flat at 185 million and 241 million, respectively. The number of EU users fell amid the rollout of tighter privacy regulations, though Facebook continued to attract new users in countries such as Indonesia. The past negative headlines about Facebook and people’s reported distaste for using the social network could finally be starting to show up in softening user numbers.
What really spooked investors is Facebook’s guidance saying revenue growth would slow in the second half of the year and that expenses would grow faster than revenue next year. The company’s chief financial officer said revenue growth would “continue to decelerate in the second half of 2018” as the company increased its investment in security and privacy. CEO, Mark Zuckerberg said “We are investing so much in security that it will have a significant impact on our profitability”. The firm plans to spend billions to improve the way it monitors content, tracks advertisers and treats user data.
The many issues relating to user data privacy, alleged election interference and the transmission of misinformation on the social media platform have been well documented, but the analyst and investor community seems to have underestimated the impact this could have on future profitability and revenue growth. A combination of slower growth in user numbers and rising costs seem to have reset expectations of Facebook’s future growth and profitability.
Whilst the company remains in a dominant position in mobile advertising alongside Alphabet Inc.’s Google, there are concerns that, with 2.23 billion active monthly users, many of the world’s internet users are already using the social media platform and that the previous levels of sustained user growth may well have peaked. This could constrain Facebook’s future revenue opportunities and with costs telegraphed to rise, the share price could see a rerating from the lofty valuations it has commanded based on investor’s prior expectations of future growth potential.
Looking at the individual portfolios, the exposure to Facebook is minimal. Lite Score 6 portfolio, which is the highest risk portfolio that uses index tracker funds, has total exposure to Facebook of less than 0.4%. The remaining Lite portfolios have lower exposure as proportionally less is invested in funds which track the performance of the North American and Global Equity markets, where Facebook has a weighting in these indices. Compared to the Lite portfolios, the Growth portfolios have even less exposure to Facebook, as not only have we recently reduced our directional exposure to the US, but also Facebook is not a top ten holding in the global or North American equity funds in the portfolios.