Topline: Despite beating analyst expectations, Facebook shares plummeted after it revealed a drastic rise in expenses in its fourth quarter earnings—as experts warn that mounting regulatory scrutiny and decelerating revenue growth could continue to negatively impact the stock.
While Facebook beat Wall Street expectations on earnings and revenue, the market’s reaction was somewhat unusual: The stock plunged after hours on Wednesday and continued to fall on Thursday, dropping more than 6%.The plummeting share price was thanks to Facebook’s increased costs and expenses of nearly $47 billion for full-year 2019—a 51% rise compared to its total in 2018 which alarmed investors.The latest drop, however, makes Facebook stock more fairly valued, according to Morningstar senior analyst Ali Mogharabi.He forecasts that with a variety of federal agencies currently investigating the company—and 2020 being an election year no less, antitrust headlines will “negatively impact the stock” and “costs associated with legal expenses are going to increase in the next few years.” While user growth has remained steady, Facebook must deal with decelerating revenue growth—and will likely have to invest more aggressively in R&D to come up with more innovative features, products and services, says Mogharabi.
“They’ll have to spend more to keep up that rate of revenue growth.” “This is not necessarily a cost-driven selloff—it’s more of a revenue selloff,” argues Adam Crisafulli, founder of Vital Knowledge.“Investors’ focus is shifting from expenses to revenue which is an interesting development for the stock.” Until there’s more clarity on whether Facebook’s decelerating revenue growth can stabilize, it’s going to be an “overhang” for the stock moving forward, in addition to data privacy headwinds which are still to come, Crisafulli describes.
Tangent: Revenues from advertising—the largest component of Facebook’s business—could also be impacted by regulatory scrutiny, making targeted advertising less effective: “Data won’t be utilized as much or as effectively as it has been historically,” Mogharabi describes.Other big tech companies like Apple and Google are also “adding more privacy capabilities into place in their own products—which obviously a lot of people use Facebook through—and that could indirectly hurt Facebook’s ability to drive growth,” Crisafulli points out.
Big numbers: Mark Zuckerburg’s net worth took a $5 billion hit after the stock’s sharp decline.As the world’s fourth-richest person, he is still worth a whopping $77.7 billion, according to Forbes ’ estimates.
Crucial quote: “My goal for this next decade isn’t to be liked, but to be understood,” Zuckerberg said during Facebook’s Wednesday earnings call.
“In order to be trusted, people need to know what you stand for,” he said, while also reiterating the company’s focus on election integrity and data privacy.The Facebook CEO also said he expects 2020 to be “an intense year with the elections,” but ultimately believes Facebook’s election integrity systems “are now more advanced than any other company.”
Key background: Facebook’s latest setback comes after the stock enjoyed a banner year in 2019.Facebook has in recent quarters continued to post positive results, despite multiple legal controversies that include scrutiny over its proposed Libra cryptocurrency and a $5 billion fine from the FTC for antitrust violations.Shares of the social network giant climbed over 50% last year, hitting several new all-time highs in recent months despite looming regulatory scrutiny.Facebook’s market cap rose by more than $200 billion in 2019 and currently sits just below $600 billion.
Further reading: Mark Zuckerberg’s Net Worth Drops $5 Billion After Facebook Results Shake Investors (Michael Nuñez)
Investing In Facebook, Apple, Netflix And Google Is A Big Mistake Right Now, Says One Portfolio Manager (Sergei Klebnikov)
Why Facebook’s Stock Seems Indestructible (Sergei Klebnikov).