Facebook Inc. appears to finally be paying for the impact of fake news in the 2016 elections and user privacy concerns, with the stunning disclosure of a revenue deceleration in the second half of this year sending shares on a mind-blowing plunge Wednesday afternoon.
During a conference call Wednesday, Facebook FB, +1.32% Chief Financial Officer David Wehner predicted bad news for the second half, and the company’s shares immediately began a drastic retreat in the extended session. Should the after-hours bloodbath continue into Thursday’s trading session, Facebook would see a $100 billion blow to its market cap after shares plunged 20%.
The decline was stunning not only because of the scale, but because Facebook had managed to avoid this type of punishment through a multitude of sins too numerous to fully list here. While the Cambridge Analytica controversy weighed on the stock, it had easily rebounded from those declines to post record highs heading into Wednesday’s report.
Even during Chief Executive Mark Zuckerberg’s congressional hearings earlier this year, the company’s shares rebounded during his testimony. Facebook seemed to have become the Teflon company, recalling references to Ronald Reagan’s Teflon-coated presidency in the 1980s.
However, when it comes to finance, the numbers matter much more than the delivery.
While investors managed to stomach the parade of bad headlines Facebook has suffered over the past year, they apparently aren’t sticking around for the effects that Wehner outlined Wednesday. Wehner told investors that Facebook’s “total revenue growth rates will continue to decelerate in the second half of 2018, and we expect our revenue growth rates to decline by high single-digit percentages from prior quarters sequentially in both Q3 and Q4.”
Wehner cited a combination of currency headwinds, a big push by the company into new products, and anticipated loss of some users due to new privacy policies. Amid the revenue slowdown, Wehner said Facebook would maintain its plans to spend heavily on some of those initiatives to combat the issues Facebook has faced of late, which Zuckerberg reiterated would weigh on profitability eventually.
“Clearly, Facebook is more focused this year on strengthening content quality and platform security, which likely accounts for part of the deceleration in revenues and user growth,” Colin Sebastian, an analyst with Robert W. Baird, wrote in a note to clients. “We note that our surveys earlier this year had suggested some ‘Facebook fatigue’ which may now be showing up in results.”
One analyst concluded in a quick calculation that Wehner’s statement would mean Facebook revenue growth slowing to about 20% in the fourth quarter, from 42% in the quarter reported Wednesday. For comparison, Facebook revenue grew 47.1% overall in 2017, and 52.7% in 2016.
Many analysts were rather dumbstruck on the conference call, with some stammering a bit as they asked questions trying to get their heads around a decline in revenue-growth that had long been presaged but never actually arrived. Wehner warned exactly two years ago this month of a coming revenue slowdown, due to a slowing ad load, but it still had not happened.
When the revenue cliff was finally outlined Wednesday, it was paired with a stall in user growth that could be even more of a sign of backlash against Facebook. Early in the company’s call, Zuckerberg said Facebook had lost a million monthly active users in Europe because of new, more detailed privacy disclosures called GDPR.
Now, as investors mull Facebook’s surprising forecast for revenue growth to sharply decelerate in the second half of the year, some may be hoping that Wehner was just the boy crying wolf again. But based on all the controversies that have surrounded Facebook this year — especially its role in the Cambridge Analytica scandal, where data from 87 million user profiles was scraped and used for marketing purposes during the 2016 campaign — Facebook is finally paying for its sins.