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Shares of Facebook in a freefall

30 Jul 2018,

The reason for the fall of the Facebook stocks in two words: “exaggerated expectations“.

On Wednesday, after the trading season has ended, Facebook released quarterly results. While earlier that day, the stocks has reached the new historical high ($ 216.30). The subsequent drop in prices was like a cold shower for traders and investors. Yesterday (Thursday 26th) the stocks were traded at around $ 175 per share.

 

When we compare the Facebook Q2 results of 2017 and 2018, we get following results:

Sales rose from 9.3 billion to 13.2 billion (+ 42%). Sales growth looks impressive but reflects a rise of the advertising costs (+ 43%). This means that Facebook does not increased the number of displayed ads, but that the whole revenue growth is based only on price rising.

 

Operating profit grew from 4.4 to 5.9 billion (+33%), earnings per share from 1.32 to 1.74 USD (+32%). The number of daily users increased by 11%. Even though all of the above-mentioned indicators grew, investors were expecting even better figures when it comes to revenue and the number of users.

 

The warning about slowing the pace of revenue growth below 10% in the future acted as a shock for traders. Together with it comes the announcement that due to the scandal with the leaking of information of clients, the company will be forced to invest massively in the security.

 

This resulted in a decline in operating profitability from current 45 percent to around 35 percent (mid-30s). This is a drop of about one fifth, which is in line with the change in the share price.

 

In the long run, Facebook’s share price today is at the level of early May. So, it returned only 3 months back in time.

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