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Facebook Earnings Disappoint: Tipping Point for Social Media?

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On Jul 25, shares of Facebook, Inc. (FB - Free Report) slid almost 20% in after-hour trading after the company reported disappointing second-quarter results. The social media giant missed earnings expectations for the first time in 11 quarters.

One of the major reasons behind its disappointing results is slowing user growth. The company also issued a weaker guidance and expects revenue growth to slow through at least the end of 2019. This translated into a collateral damage for other tech stocks, with shares of Apple, Inc. (AAPL - Free Report) , Amazon.com, Inc. (AMZN - Free Report) , Alphabet, Inc. (GOOGL - Free Report) and Netflix, Inc. (NFLX - Free Report) plummeting on Jul 25.

Despite making huge gains this year, Facebook has been suffering social and political backlash. Understandably, the data misuse scandal has been taking a toll on Facebook, with users preferring other social media platforms such as Twitter, Inc. (TWTR - Free Report) and Snapchat Inc. (SNAP - Free Report) .

Facebook Feels the Heat

On Wednesday, Facebook lost almost $150 billion in two hours after missing both earnings and revenue estimates. One of the primary reasons being attributed to the disappointing results is slowing user growth. The company added just 22 million users worldwide, its lowest quarter-over-quarter jump since early 2011. The social media giant revealed that it is no longer growing in the United States and Canada.

To add to its woes, Facebook’s daily active users declined from 282 million to 279 million in Europe. While Facebook reported MAUs of 2.23 billion, missing expectations of 2.25 billion, DAU’s came in at 1.47 billion, falling shy of of the expected 1.49 billion.

Privacy Policy in Focus

Earlier this year, Facebook got embroiled in the Cambridge Analytica data misuse scandal, which affected the personal information of more than 80 million users. This saw the company’s shares taking a hit immediately but that didn’t reflect in its first-quarter results. However, users seem to have somewhat lost faith in Facebook’s privacy policy that is evident in its numbers this reporting cycle.

In fact, Facebook’s CEO Mark Zuckerberg in late 2017 had said that the company’s fight against abuse from foreign governments in the form of misinformation and fake news could substantially cut into it profits.

Understandably, user privacy has become a priority for social media platforms. According to a Wall Street Journal report, Twitter is tightening up its privacy policies and suspended about 70 million accounts in May and June.

Twitter will also be introducing a new option that allows users to report suspected violations of policies for review by the company. Also, Snapchat recently launched Snap Kit, which has been designed to prioritize user privacy and security. Twitter has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Moreover, Snapchat last year came out of beta with a measurement pixel, that helps improving attribution and allows the company to report on metrics such as return on ad spend, as the Facebook platform does.

Changing Face of Social Media

In fact, Facebook’s chief financial officer David Wehner revealed that the recent instability in user growth would continue to accelerate and could rise to single-digit percentage point in the third and fourth quarters. Slower user growth definitely shows that users are more concerned about privacy, which definitely had tarnished Facebook’s image after the data misuse scandal. 

The face of social media too is changing. Youngsters are more inclined toward videos, which have seen the likes of Facebook-owned Instagram and Snapchat gain popularity. In fact, Twitter, which reported a slowdown in revenues through 2017, reported impressive figures in the first quarter. The company’s international ad revenues jumped 53% year over year, which the company attributed to strong growth in video in Asia Pacific and China.

Snapchat had been a hit with youngsters because of its video feature. In fact, the company has often called itself a “camera company.” However, its user growth has been suffering ever since Instagram introduced the feature, Stories.

Summing Up

Facebook has lost almost one-fifth of its market cap post its disappointing results. If this continues through Thursday, the company could well lose the $13.7 billion gains made this year and slip into the red territory. At the same time, slowing user growth hints at growing concerns over privacy policy which has become a prime area of focus for social media platforms.

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