Facebook's stock dropped by $120 billion this week, but critics are dead wrong for calling it 'doomed'
- The news surrounding Facebook this week has been unrelentingly negative after it offered a disappointing earnings report and its stock fell 20%.
- But the sentiment has gotten a bit detached from reality.
- Facebook isn't going out of business anytime soon; in fact, it's still doing exceedingly well.
- And instead of being a sign of deep trouble at the company, the stock sell-off could be seen as a simple correction after a recent rapid rise.
You might have thought from the tone of the coverage following Facebook's earnings report Wednesday that the company was on the brink of bankruptcy.
The results were repeatedly dubbed "disastrous" by reporters and analysts alike. The company was called "friendless" in headlines. And following the report, investors dumped the stock like it was like it was so much rancid meat, leading to a $120 billion decline in Facebook's market valuation, the biggest one-day drop ever.
But here's the thing: For all the furor, Facebook is doing just fine.
Yes, the company's second-quarter results were somewhat disappointing. Yes, it warned that in coming periods its sales will grow slower and its expenses faster than Wall Street was expecting. Yes, the company's user growth is flatlining in the United States and falling a bit in Europe.
But Facebook is still growing rapidly. It's enormously profitable. It's still adding users in many places around the world.
And more importantly, the two big reasons its outlook for coming quarters was so disappointing are that it's spending money to address some of its recent high-profile problems and is investing in its future.
This is a correction, not a sign of disaster
Instead of seeing Thursday's sell-off as some sign of impending doom for Facebook, it could be viewed as a simple correction, one that happens all the time for stocks that get ahead of themselves.
In fact, that's just how Henry Blodget, our CEO, saw it:
Facebook's shares had been on a tear since March, when they plunged during the Cambridge Analytica scandal. After it became apparent that that fiasco wasn't going to ruin the social network, investors piled back into the stock.
From March 27 - when they hit their lowest point in the last year - through Wednesday, Facebook's shares rose a robust 43%. At the close of trading, Facebook was valued at 36 times its trailing-twelve months earnings, through its first-quarter results. That's a pretty pricey premium for a company the size of Facebook.
It wouldn't be surprising then that investors might want to take some profits off the table, especially when the company warned that its results won't be as good going forward. But it's not like they're abandoning the stock completely. Even with their 20% decline on Thursday, Facebook's shares were still up 6% over the last year and nearly 16% from their March nadir.
That's not a stellar return, but it's not terrible. You can bet investors in Helios and Matheson, the parent company of the money torching movie ticket subscription services MoviePass, would kill for that kind of return. Helios and Matheson's shares were down more than 60% on Friday alone. And that drop came on top of a worse-than-50% decline earlier in the week.
Many companies would love to be in Facebook's position
Likewise, for all the uproar about Facebook's results and its reduced outlook, many companies and their shareholders would be ecstatic to have Facebook's problems.
After all, revenue at the social-networking giant grew 42% in the second quarter, and the company expects it to grow at a rate north of 30% going forward. While it expects its operating margin to fall in coming quarters, the forecast decline is from a phenomenal 44% in the just-completed period to a still extremely health rate above 30% in the future. And while its user growth is slowing, its core service still grew its monthly active user count by nearly 2% from the first quarter and 11% from the year-earlier period.
If a company that just posted a $5.1 billion quarterly profit, has $42 billion in cash and investments on hand, has a total user count equivalent to a third of the world's population, and is still growing like a weed is in trouble, we've all got problems.
And while investors freaked out about the reduced expectations, there's reason to think they'll appreciate the causes of them later on. Facebook's image has been battered by a series of scandals, from the Russian-linked groups hijacking its services to spread propaganda during the 2016 election to the hateful message that spurred violence in Myanmar against its Rohingya minority to the illegitimate acquisition of the data of millions of users by Cambridge Analytica. It's facing growing calls by policymakers to rein in its service with new regulations.
Facebook is investing for the future
Since last fall, the company has been working to revamp its services to try to address these problems, prevent future scandals, and potentially head off regulations. It's invested it artificial intelligence and machine learning tools to try to identify hate speech and other abusive posts. It's created a new advertising system that allows all users to see what ads are being run on its site. And it's in the process of hiring thousands of people to better screen content posted on its services.
We can argue whether it's doing enough, but from here, the investments look like smart ones to make, particularly if they allow the company to avoid new laws which could potentially crimp its profits even more.
But, as CEO Mark Zuckerberg made clear on a conference call with analysts, Facebook is also investing in the future. It's developing new products. It's also shifting away from the News Feed toward Stories, a new format that's proven popular with particularly with younger users that combines pictures and text into transitory packages. Again, that looks like a good move. Facebook is trying to stay relevant and ensure future success, even if it means a short-term hit to profits.
So don't get caught up in the hype. Facebook isn't going out of business. It's not even doing poorly. In fact, it's doing rather well. And, I know, a headline that reads "Facebook is still in good shape" isn't as exciting as "Facebook is doomed." But it has the benefit of being the truth.