Facebook Shares Plunge on Growth Fears

Shares in Facebook fell 20% at the open on Thursday as investors shunned the social media giant, knocking billions off its market value

James Gard 26 July, 2018 | 4:32PM Alison Roff
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Facebook Shares Plunge

Social media giant Facebook (FB) plunged 20% at the open on Wall Street on Thursday as traders caught up with the company's disappointing second-quarter results. The shares had already slid in after-hours trading, wiping around $100 billion off the company's market value and the personal fortune of founder Mark Zuckerberg.

Wall Street analysts had estimated a rise in active users to 2.25 billion, but this fell short. A 50% rise in costs year on year was driven by investment in data security after the Cambridge Analytica scandal. What really spooked investors was a warning by Chief Financial Officer David Wehner that total revenue growth rates would fall in the second half.

Total revenue rose by over 40% year on year in the second quarter, but this is expected to halve in subsequent quarters.

After the results, Morningstar equity analysts reduced their fair value estimate for Facebook shares to $186, above the current price of just below $180, saying that investors should wait for a better entry point before buying the shares. The current worries over revenue growth are a "bump in the road" before better times ahead in 2020, they say.

What Analysts Say

"Facebook reported slightly mixed second-quarter results with revenue in line with our internal forecast but below consensus," says Ali Mogharabi.

"The firm did beat expectations on the bottom line. However, Facebook's profit margin guidance was disappointing as the company will be investing further in innovation, content creation, and data protection, was disappointing. In light of the soft profitability guidance, we are lowering the fair value estimate for Facebook by 6% to $186.

"Total revenue growth was hampered by slower growth in monthly and daily active users due to the implementation of GDPR in Europe, partially offset by higher revenue generated per user. While margins remained at impressive levels, they did narrow year over year, as we had expected and noted in our previous reports

"We remain confident that Facebook will successfully roll out new products for users and advertisers and the firm can continue to more effectively monetise its users as the company begins to offer more premium video content not only on Facebook Watch but also on Instagram's IGTV. 

"Plus, we believe the firm will realise return on its investments in content quality management and data security in 2020 and beyond, resulting in longer-term margin expansion. With the stock down about 20% after hours, we now view shares as slightly undervalued when compared with our new $186 fair value estimate. We recommend waiting for a wider margin of safety, likely in the $150-$160 range, before investing in this wide-moat and high uncertainty name.

"Total revenue came in at $13.2 billion, up 42% year on year. Revenue from advertising remained strong, growing 42% from the prior year to $13 billion. While demand for the firm's ad loads continued to grow, as indicated by higher ad prices and ads sold, the slowdown in user growth represents a bump in the road for Facebook revenue growth."

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Facebook Inc A187.47 USD1.98Rating

About Author

James Gard  is content editor for Morningstar.co.uk