Why shares of popular social networks are rapidly becoming cheaper
26 July 2018 Facebook lost $119 billion of its value. For comparison, the market value of Gazprom is estimated at $57.8 per billion Personal capital Mark Zuckerberg fell by almost $16 billion, which exceeds the value of companies such as Novolipetsk steel and Severstal estimated at $15 and $14 billion respectively.
According to Bloomberg, it was the biggest one-day drop in the history of the US stock market exceeds the drop in Intel at $91 billion in September 2000. Shares of Facebook fell more than 20%, from $214,24 to $173. The number of operations with securities has reached 34 million, while in regular days it isn’t more than 17 million Drop July 26 at 3% higher than the March lows of the stock Facebook caused a scandal with Cambridge Analityca.
How falling stock Facebook
Over the last 18 months Facebook has experienced one PR disaster after another. First appeared information about the use of fake accounts that were used to influence the presidential election in 2016. Then began to receive information of unfair use of private user data. Not so long ago, Zuckerberg, talking about the legality of the existence of different opinions in the pages of the network, used the example of Holocaust denial. However, none of these failures could not, in the opinion of the analysts of Wall Street, to influence the position of the media giant, recent years demonstrate a stable and rapid growth.
A storm broke out only on July 26, the day after the publication of the quarterly report. Second quarter results were below estimates made by Wall Street experts. It happened for the first time after 2015. The number of active users in reality amounted to 2.23 billion , not the estimated 2.25 billion and a profit of $13.2 billion, according to forecasts of $13.4. The revenue from advertising totaled $13.04 billion, with projections of $13.16 billion.
Despite the fact that long before 25 July, Facebook has repeatedly warned shareholders that the changes in the organization of the information flow, in particular the emergence of News Feed, and additional costs to increase security will result in a reduction of profits, the shareholders were not ready.
Published 25 July report was the first after the scandal with Cambridge Analytica associated with the leak of personal information. However, experts believe that modest growth in new users is associated rather with entered in may a new European privacy regulation – GDPR, which required the cost of changing procedures for the processing and storage of data. During June the number of users in Europe declined by 1 million, the company argued that this decrease is not significant.
Introduction in Europe, the new rules of information processing caused a decline in advertising revenues. Company representatives believe that users control their own information reduces the possibility of its use in advertising, thereby reducing advertising income. However, in Facebook are confident that ultimately the introduction of the GDPR will play into their hands, because only large companies have sufficient resources to adapt to the new requirements. In addition, the scandal with the leak of information has caused many advertisers to limit their spending on the platform.
Representatives of Facebook explained the situation with increased costs of developing new products, for example, Stories, and measures to track fake news. According to Mark Zuckerberg, just for the security of information the company plans to hire more than 20 thousand new employees.
Since Facebook has basically exhausted the possibilities of rapid growth in the U.S. and Western Europe, the company began to pay special attention to such populous developing countries as Brazil, India and Indonesia. However, due to the poverty of these countries, the company’s revenues are much lower than in developed countries.
According to experts Thorpe Abbotts Capital, the situation around the company just returned the correspondence between the market price and the real situation, albeit with some margin. So, Wedbush analyst Michael Pachter (Michael Pachter) believes that now the stock price is unreasonably low, and expects that by the end of the year it will be about $250. “The company is growing quickly and slightly worse than a company growing very quickly,” he said.
The prospects for recovery rates Facebook
Chief financial officer David Wenner (David Wehner) is not encouraging for shareholders. He argues that “in the second half the situation is unlikely to change. Moreover, the existing excessive rate of growth of expenses over income (36% vs. 17% in the first half of 2018) will continue in the next, 2019, year, as the company will continue to work on improving privacy and new product development”. This means that short-term investors will continue to dump the stock, a continuation of the negative trend.
The company may be subject to prosecution by the users or the tightening of rules on information processing in Europe. In this case it will suffer reputational damage, which could put further pressure on the share price.
Many investors, particularly rich Greenfield (Rich Greenfield), an analyst at BTIG argue that the growth of company’s costs is not an indication of poor management. So, invest in Instagram paid off pretty quickly, and turned the platform into a tangible source of income. Great expectations are associated with the development of Messenger monetization which is still at the initial stage, but its extent can be judged now. So in early August, information appeared about the request made by the company in the four largest US banks. Referring to the development of new applications for Messenger, Facebook asked them for information about transactions for debit cards, and balances of current accounts of clients. These data will be used for targeted advertising.
The unprecedented expenditures that are made to improve the transparency of applications and data security, and the development of the artificial intelligence system should increase the level of user confidence and improve the reputation of the company that sooner or later will have a positive impact on capitalization. All the measures taken correspond to the needs of time and should not only be recouped but also to provide the company with significant marketing advantages.
Facebook remains the undisputed leader of social media, considering he owned WhatsApp and Instagram. The number of users exceeds 2 billion, which in itself is a huge competitive advantage, which for several years gave the company the ability to annually increase the profit by 40%. For comparison, other companies from the top 500 stock market had an average annual growth equal to 10%. This is the pace that Facebook intends to achieve before the end of the year. He doesn’t look intimidating.
Most experts believe that the current price of low price is a great entry point for long-term investment. According to CNN Money, aggregating the forecasts of leading analysts recommendations for purchase give 37 of the 47 respondents. The forecast average price by the end of next year is $205 (according to optimistic estimates – $221.8), which is 11% higher than the current $184.8.