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Facebook stock dived 20% in a single day. Here's why

Facebook stock dived 20% in a single day. Here's why
Facebook's user base and revenue grew more slowly than expected in the second quarter of 2018. (Richard Drew / Associated Press)

Facebook was a golden goose. Then, on Wednesday afternoon, the social networking giant introduced a shocking idea: It probably can’t sustain its enormous rate of growth.

The news helped send Facebook shares into a tailspin, dropping more than 20% on Thursday.

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David Wehner, Facebook’s chief financial officer, said in Wednesday’s earnings call that the company would see operating margins — a measure of profitability — fall from 44% today to “the mid-30s” in the next several years.

The revelation underscored how Facebook, long a Wall Street darling, can’t endlessly spoil investors with exponential growth.

The stock selloff “has everything to do with not being able to grow forever,” said Brian Wieser, an analyst for Pivotal Research Group.

Facebook posted $13.2 billion in revenue for the three months that ended in June — just short of analysts’ estimates of $13.3 billion. It’s the first time the company has missed analyst targets for revenue since 2015.

So what’s to blame for Facebook’s slowdown?

For one, the ripple effect of all its scandals. Facebook is navigating a world in which lawmakers and consumers have woken up to the vulnerabilities of user data.

Facebook’s changes to security and privacy settings is in response to its handling of the Russian misinformation campaign and the Cambridge Analytica controversy. Those changes are costly because it undermines the data collection that drives Facebook’s advertising business.

The European Union also enacted strict new laws in May that limit any company’s ability to collect personal information.

“The stricter security initiatives, screening of ads, and overall data privacy issues [in Europe] have created headwinds for Facebook,” said Daniel Ives, an analyst for GBH Insights.

Facebook also cited “currency headwinds” and the promotion of new formats such as the video-and-photo montage feature Stories for the decline in revenue growth.

Stories posts, which disappear after 24 hours, pull in less ad money than posts that appear on Facebook’s News Feed. But they’re also not as risky. Facebook’s News Feed is where fake news stories are often shared, inviting more controversy to the embattled company.

Still, it came as a surprise when Wehner said in Wednesday’s earnings call that Facebook was committed to a less lucrative product.

“We plan to grow and promote certain engaging experiences like Stories that currently have lower levels of monetization,” Wehner said.

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