Will the decrease in Facebook value be the greatest in history?

26.07.2018 14:56|Bartosz Grejner

"Investor anxiety after the publication of Facebook’s financial results caused the value of shares to fall by almost a quarter. Is this the end of the world's most popular social media site? Or is this panic from investors hasty and is a bright future still ahead for Zuckerberg?" writes Bartosz Grejner, Conotoxia Analyst.

Yesterday, late in the evening, Facebook published data for the second quarter of this year. The company generated 13.23 billion USD in revenue, but the market was counting on more. 100 million dollars is a relatively small difference, but the last time the most popular social media site differed from analysts' estimates was in 2015. In the OTC quotations, the market value of the social media giant fell by as much as 151 billion USD. This was not the only reason for disappointment.

Although the total number of active users per day, increased overall (to 1.471 billion people), it still fell in one region. In Europe, Facebook was used daily by 3 million fewer people than in the first quarter of this year, a total of 279 million.

The worst forecasts, however, were made by the company’s top executives during a teleconference with analysts. The revenue growth rate amounted to 42% and is expected to decrease by nearly 10 percentage points in the following two quarters. In addition, Facebook bosses anticipate that in 2019 the cost growth rate will even surpass it. The combination of these two negative trends may threaten the company’s net result.

A heavy price for respect of privacy

Facebook bosses pointed at less favourable exchange rates and expenses for development, but in fact, it may be mainly about increasing the level of privacy for users (which was also one of the reasons).

The European Union has implemented the General Data Protection Regulation (GDPR). For Facebook, this means changing its privacy policy and logging in. In practice, the majority of users will have personalized ads, which means lower revenue for Facebook.

Both the financial data publication for the second quarter and the teleconference took place after the closing of official quotations in the USA. However, in the so-called after-market quotations, Facebook shares fell by as much as 24%, which, according to Bloomberg, meant a drop in the company’s market capitalization by 151 billion USD. Taking the current market exchange rate of the dollar (3.66 PLN) into account, that amounts to 552.66 billion PLN.

Decrease in the value of almost half of the Polish stock exchange

If we compare this with the market capitalization of all domestic companies in the Polish stock exchange, which amounted to 569.3 billion PLN in June, we can conclude that yesterday’s decrease on Facebook alone was worth 97% of its total value. The total capitalisation of companies listed on the Polish stock exchange yesterday amounted to 1,242.36 billion PLN. Such a decrease, which we observed yesterday on Facebook shares, a few minutes outside the session, would erase 44% of the value on the Polish stock exchange.

If yesterday’s after-market falls in Facebook stock continue during Thursday trading (about 24% 151 billion USD), it will be the biggest drop in history in the value of a U.S. company in one day. However, the news about the end of the social media giant seems hasty.

Greater government attention to privacy and recent scandals (including those involving Cambridge Analytica) will limit the pace of the company’s growth, but are unlikely to stop it from dominating. The company will seek greater monetization of its other services, including Instagram and Stories, of which revenue is already growing faster than Facebook’s basic services. This will most likely maintain the company’s position as a strong leader in the social media industry and make up for the losses incurred relatively quickly.

 


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