Market Watch: Is Facebook's Future at Stake?

access-app-application-267399.jpg

Facebook drew in quarterly earnings which were revealed to be short of their predicted numbers on Wednesday, July 25, causing U.S. stock markets to close lower. A combination of disappointing earnings, slowing user growth, and stagnating faith in the company’s guidance led to the largest one-day drop in the social media giant's stock: a whopping 19 percent just on Wednesday, amounting to almost $120 billion. The company’s broad equity base meant that its drop weighed down the overall stock market, even though seven out of eleven primary industry groups rose that day

The drop signified just how vulnerable the stock market is to shocks from tech giants like Facebook, Apple, Amazon, Netflix, and Alphabet Inc.-held Google (FAANG), which many analysts claim to be overvalued. For instance, the tech industry has managed to lift the S&P 500 away from ‘defensive stocks’—which are life jackets for investors in a volatile market—by almost 60 percent since 1991 through to June of this year. Thus, investors are more exposed to shocks in a limited portfolio with more weight to each of its components.

The tech industry has been treated like a bulletproof fortress for quite a while. Exponential growth, ground-breaking technology, and progressive ideals create the industry’s persona of hope for the future. Nonetheless, recent events such as Facebook’s association with Cambridge Analytica and Chief Executive Mark Zuckerberg’s hearing in front of Congress officials shed some light on what could happen to any company left unregulated—particularly one that holds so much personal information for its users. Almost predictably, users were disheartened after the truth of Facebook’s conduct came out. Whether Facebook’s actions were deliberate or not, users were unhappy and the company’s plummeting usage showed this. 

The lead-up to one of Facebook’s worst days in the stock market revolves around many factors. Firstly, it is worth noting that the company’s income per share was up from $1.32 a year ago ($3.89 billion in net income) to $1.74 this quarter ($5.12 billion in net income). These results beat the predicted $1.71 per share. Nevertheless, the main source of concern was less from profits and more from lower-than-expected results and insider information. User growth is stagnating in Northern America and falling in Europe, most likely due to the European Union’s General Data Protection Regulation. Three million daily users and one million daily users from Europe left the site since the first quarter, according to Market Watch.

The company’s Chief Financial Officer David Wehner spoke to analysts over a conference call and mentioned that slow revenue is expected to continue throughout the latter half of 2018. The direct reaction from this call was a 7 percent drop in the company’s stock. Zuckerberg points to an increase in spending on Facebook’s safety department as a reason for lowering profitability, claiming it was expected.

To show end numbers, the stock was left valued at $176.26 on Thursday, July 26, with a market capitalization of $510 billion, down from Wednesday’s $630 billion. The number of shares exchanged on Wednesday was 34 million, which was almost twice the average trading volume for the previous month.  

The Nasdaq Composite Index had still been performing well amidst turmoil from the trade war prior to Facebook’s drop. The tech industry, which upholds much of Nasdaq, remained unaffected by investor stress related to trade tensions, eurozone political uncertainty and a slowing global economy. However, as Jim Paulsen, chief market strategist at Leuthold Group puts it, “There's a lot of sheep following another,” denoting the market behavior of individuals investing with a herd mentality rather than a direct consideration of the tech industry’s performance. 

While other FAANG stocks like Apple are performing well, perhaps it is worth noting that this drop for Facebook is just as anticipated as Zuckerberg said it was. Sure, with the Trump administration’s push to end foreign investment in U.S. tech companies, Facebook may be set for more problems ahead. However, it seems as though this is Facebook’s adjustment period to a plethora of changes, including the EU’s GDPR. Tech is still set to thrive, it’s just going to break a few unexpected records first.