It has been roughly one month since Facebook (FB - Free Report) reported second-quarter financial results that sent many investors running. So let’s evaluate Facebook since its infamous July 25 earnings release.
User Growth Woes
Facebook saw its second-quarter revenues soar by 42% to hit $13.23 billion, while its quarterly earnings jumped by 32%. Both were impressive for a company making that kind of money. But investors didn’t care about Facebook’s strong top and bottom line expansion because of its slowing user growth.
Mark Zuckerberg’s company saw its daily active user totals in Europe fall from 282 million in Q1 to 279 million. Facebook also experienced a sequential decline in terms of monthly active users in this key region. Meanwhile, Facebook saw its DAUs climb by just about 1% in the U.S. and Canada to close the quarter with 185 million. Plus, at 241 million, MAU’s were also flat from Q1 and up only 2% from the year-ago quarter.
It is worth noting that Facebook expanded both its MAU and DAUs in its Asia-Pacific and “Rest of the World” regions. However, this growth did little to calm investors since the U.S., Canada, and Europe generated roughly 72% of FB’s total Q2 revenues, while only making up approximately 28% of Facebook’s total monthly active users.
Clearly, investors and Facebook don’t want to see its user totals start to plateau in the U.S., Canada, and Europe. Luckily, the firm still offers advertisers access to consumers that are harder and harder to reach during the age of Netflix (NFLX - Free Report) , Amazon (AMZN - Free Report) Prime, and increasingly decentralized media. Therefore, Facebook and Google (GOOGL - Free Report) will likely continue to grab a huge chunk of total U.S. ad dollars, which is vital to the company that makes nearly 99% of its revenues from advertising.
But the bad news didn’t stop at the company’s slowing user growth, which is inevitable for a company that boasts 2.23 billion MAUs. Facebook’s CFO David Wehner—in a moment he might now regret— said that the company expects its operating margins will fall into the "mid-30s on a percentage basis" over the next several years. The executive also noted that Facebook expects its “total expense growth will exceed revenue growth in 2019.”
Wehner’s operating margin projection, more than anything else, might have caused the massive post-earnings release selloff. The truly scary part for investors is that Facebook posted an operating margin of 44% in Q2, which was already down from 47% in the prior-year quarter.
“Fake News” Problem
Facebook noted that major investments in augmented and virtual reality as well as marketing and content acquisition will contribute to its declining profitability. The firm’s CFO also said that spending on safety and security is set to surge. In fact, “safety, security and privacy” was one of the first things that Zuckerberg spoke about on FB’s Q2 conference call.
The company hopes to make its platform more transparent and limit the spreading of misinformation, which became a huge point of contention that forced Facebook’s CEO to testify in front of members of Congress earlier this year.
Facebook suffered the largest-ever one-day loss in market value for a U.S.-listed company following its quarterly earnings release in late July. Shares of FB plummeted 19% in one day, which erased roughly $119 billion market cap.
Investors will notice that Facebook stock has hardly recovered since its huge drop off despite news that it is actively trying to enter new potential growth areas. Facebook reportedly has been in talks with JPMorgan Chase (JPM - Free Report) , Wells Fargo (WFC - Free Report) , and Citigroup (C - Free Report) to see if the banking giants would be open to partnerships to help increase user engagement.
Facebook, along with Twitter (TWTR - Free Report) and other social media companies, has added more live video offerings, which might prove vital as a growing number of people and even governments become more concerned about cellphone addiction. Facebook needs to be able to offer users more than the ability to endlessly scroll through posts, which live video, from news to sports, could provide.
Our current Zacks Consensus Estimate is calling for Facebook’s third-quarter revenues to jump 34% to reach $13.83 billion. FB’s revenues are projected to hit $55.46 billion in fiscal 2018, which would mark over a 36% climb. Meanwhile, Facebook’s adjusted Q3 earnings are expected to sink nearly 7%.
Facebook’s earnings estimate revision activity has also trended almost completely downward for Q3 and for fiscal 2018 and 2019, over the last 60 days, which helps give Facebook its current Zack Rank #5 (Strong Sell) standing. Investors might want to stay away from FB stock at the moment since it wouldn’t be surprising to see further declines.
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