Does Facebook's plummeting stock spell disaster for the social network?

The company lost $118bn in market value after news of slowed growth and rising costs. But is it more than a blip?

Facebook’s stock price took a 20% tumble this week after the company’s latest quarterly earnings revealed stagnating user growth in key markets and rising costs associated with tackling misinformation, election interference and privacy issues.

More than $118bn was wiped off the company’s market value and Mark Zuckerberg’s fortune took a hit of $16bn, after the company announced its financial results for the second quarter of 2018, the company’s first full quarter since the Cambridge Analytica scandal broke.

How bad is it for the social network?

Why is this happening?

The core problem appears to be decelerating revenue growth, fuelled by user base stagnation in Europe and the US, where Facebook makes the bulk of its advertising revenue. During the earnings call the company revealed that growth would continue to slow down throughout the second half of 2018, moving the company from a long period of “hyper-growth” (more than 40% year on year) to just high growth.

“We expect our revenue growth rates to decline by high single-digit percentages from prior quarters sequentially in both Q3 and Q4,” said the company’s chief financial officer, David Wehner.

“It’s usually a slow progression going from hyper-growth to just growth. In this case it’s a step function down. That’s why you are seeing more of an overreaction,” said Loup Ventures’ Gene Munster.

Is this because of privacy problems identified in the Cambridge Analytica scandal?

To a certain extent. The platform’s investment in security on the platform, including tackling election interference, misinformation and privacy problems is a major contributor to rising costs. Facebook’s privacy practices came under the microscope after the Observer revealed in March that the data firm Cambridge Analytica inappropriately obtained tens of millions of users’ data without their permission.

However, Facebook ramped up spending after 2016 US presidential election and has been warning about how that would affect profitability since November 2017 – well before the key Cambridge Analytica revelations in March this year.

Lynnette Luna, the principal analyst at GlobalData, put it down to an “amalgamation of weird things happening at the same time”. She noted that in addition to the slower growth and bad publicity over the last 18 months, Europe’s General Data Protection Regulation, was a significant factor, contributing to a drop of 3 million users between Q1 and Q2.

“It’s an unfortunate market condition,” she said.

How significant is this for Facebook?

It’s the biggest ever one-day drop in a company’s market value, falling from a record high of $619bn on Wednesday to just $501bn in early trading on Thursday.

However, the company’s valuation is still higher than it was after the US Federal Trade Commission confirmed it was investigating the company over its privacy practices following the Cambridge Analytica revelations.

The core problem for Facebook appears to be decelerating revenue growth, fuelled by user base stagnation.
The core problem for Facebook appears to be decelerating revenue growth, fuelled by user base stagnation. Photograph: Alamy Stock Photo

What does this mean for Facebook employees?

A little-discussed problem for Facebook is the impact falling stock prices have on employees. Most Facebook staff get a significant portion of their total compensation in shares. Up until now, in spite of a litany of scandals after the 2016 election, the company has consistently grown, which makes it easier for the company to retain loyal staff.

“If a perception sets in that the stock price is not going to be as positive a force for their total compensation, that may have a profound impact on Facebook,” said Roger McNamee, an early Facebook investor and outspoken critic of the platform.

McNamee said that the company’s rising stock price had made employees “willing to overlook” some of the company’s problems, including questions over its role in skewing elections, the proliferation of misinformation and hate speech on the platform, and its use by totalitarians in Cambodia and the Philippines.

“If the stock has been the medicine that allows them to do that and employees stop being confident in the stock, you have the chance for a Susan Fowler moment,” he said, referring to the woman who sparked a revolt at Uber after publishing an essay highlighting widespread sexism within the company.

Is this the beginning of the end of Facebook?

Absolutely not. Even though user numbers on the social network are stagnating in Europe and the US, the company still managed to squeeze more revenue from every user.

Furthermore, the company has a lot of monetisation opportunities with Instagram (thanks to the recent launch of IGTV), Marketplace, Messenger and getting businesses to pay to interact with customers through WhatsApp.

“Expect to see a bigger emphasis on growth of Facebook’s family of platforms rather than Facebook proper,” said Luna.


Olivia Solon in San Franisco

The GuardianTramp

Related Content

Article image
Facebook's quietly confident IPO | Paul Carr
Paul Carr: Mark Zuckerberg is likely to stay tight-lipped about Facebook's stock market flotation – unlike other Silicon Valley CEOs recently

Paul Carr

31, Jan, 2012 @2:56 PM

Article image
It's complicated: Facebook's terrible 2018
Privacy scandals, congressional hearings, and PR disasters: a timeline of a long and difficult year for Mark Zuckerberg

Julia Carrie Wong and Sam Morris

24, Dec, 2018 @6:00 AM

Article image
The panic over Facebook's stock is absurd. It's simply too big to fail
Despite some critics’ glee at the latest earnings report, the planet’s most powerful business remains unstoppable

Siva Vaidhyanathan

27, Jul, 2018 @8:00 AM

Article image
Is Facebook a publisher? In public it says no, but in court it says yes
In its defense against a former app startup, Facebook is contradicting its long-held claim to be simply a neutral platform

Sam Levin in Redwood City

03, Jul, 2018 @6:00 AM

Article image
Facebook's Mark Zuckerberg pokes his way into politics
Why is the Facebook billionaire entering the political fray with a group of other Silicon Valley entrepreneurs? And will it mark the start of a new career for Zuck?

25, Mar, 2013 @3:11 PM

Article image
Facebook village? Social media giant to build 'social housing'
The tech giant aims to build 1,500 apartments at Menlo Park after being criticised for helping to deepen the Silicon Valley housing crisis

Rupert Neate

10, Jul, 2017 @6:51 AM

Article image
Political controversies overshadow Facebook's strong financial report
Company reports revenues increased 29% year-over-year to $17.7bn and profits grew 19% to $6.1bn

Julia Carrie Wong

30, Oct, 2019 @11:20 PM

Facebook's flotation: more pokes than likes | Editorial
Editorial: Even the biggest risks can come off in Silicon Valley, and Zuckerberg might just show he has the ingenuity to surprise cynics


25, May, 2012 @9:19 PM

Article image
Mark Zuckerberg and Jack Dorsey face Senate grilling over tech platforms – as it happened
Chief executives of Facebook and Twitter quizzed by judiciary committee on allegations of anti-conservative bias and handling of election

Kari Paul in San Francisco

17, Nov, 2020 @8:04 PM

Article image
Facebook posts record revenues for first quarter despite privacy scandal
Company sees almost $12bn in revenue, up nearly 50% from last year and beating analyst estimates as Zuckerberg hails ‘strong start’

Olivia Solon in San Francisco

25, Apr, 2018 @10:32 PM