Ouch! There is no other way to say it given the 19% drop in Facebook (FB) shares Thursday following what can only be described as unexpected results inside its June-quarter earnings report. Let's remember that expectations have been running high for Facebook as advertisers look to reach increasingly connected consumers across Facebook, Instagram and the company's other social media platforms.
Indeed, those expectations and the potential impact to Facebook's revenue and bottom line were what catapulted the stock from $160 in late April to Wednesday's closing price of over $217.50. That's a surge in excess of 35% in 14 weeks, compared to a 6.7% rise in the S&P 500 over the same time frame.
But that was before last night's earnings call...
While Facebook reported a second-quarter earnings beat and rising revenue per customer in the U.S., the rest of the press release and earnings conference call took the bloom off the rose that is Facebook. Revenue for the quarter missed expectations and management guided for declines in revenue growth in the back half of 2018 as spending on safety and content continue leading to a one-two punch to its operating margins. For those tracking monthly and daily active users, there was saw a sequential dip with the U.S. users flat but a 3 million drop in Europe due in part to General Data Protection Regulation (GDPR) that went into effect in late May.
You may recall that earlier this year management telegraphed a shift toward community that would likely hit revenue growth, but as management shared on the earnings call, it expects "revenue growth rates to decline by high-single-digit percentages from prior quarters sequentially in both Q3 and Q4." Not exactly the vector or velocity that investors had been expecting at all.
Adding to the shock and awe of it all was the simple fact that this was the first time the company has missed expectations since the March 2015 quarter. However, continued investment and revenue pressure is expected to take its toll and we are seeing operating margin expectations reverse course -- going to mid-30% vs. the mid-40% that was previously forecasted by Wall Street for 2018 and 2019.
The net result has the shares crashing as analysts put pencil to paper to re-forecast top and bottom line expectations. While that happens, we've already seen several investment banks slash their price targets to the $180-$185 level and a number of them also cut their "Buy" ratings to "Hold."
As one who has not been involved with Facebook shares since March when Bob Lang and I exited the shares with Trifecta Stocks subscribers, the question is do we jump in here and now? At the time we had been trimming the position back at higher levels, but we were concerned about the potential fallout from Cambridge Analytica as well as implications from the phase in of GDPR. There was also the hefty amount of insider selling on behalf of CEO Mark Zuckerberg as well as COO Sheryl Sandberg. When management is selling that much stock that fast, it's usually not a good sign.
Getting back to the question raised, above, we believe it hinges on the value in the shares relative to revised EPS expectations and management gaining back some credibility.
Do I expect advertisers will continue to utilize all of Facebook's platforms to reach consumers? Yes, but even Facebook has stated that corporate advertising using Instagram's Stories is ramping slower than expected.
For me, and most likely Trifecta, Facebook shares will sit in our Bullpen of stock ideas until we see user engagement metrics rebound and the share price reflects not only revised growth prospects but a favorable value to be had.
I don't expect that to happen in just a few days, but that said, I'll be watching how those revised EPS and revenue expectations shake out.