Revenues of $13 billion, an operating margin of 44%, net income of $5.1 billion and a share price plummet of 17% overnight; Facebook has not impressed investors with its latest quarterly results.

Jamie Davies

July 26, 2018

3 Min Read
Facebook financials fail to impress as share price plummets

Revenues of $13 billion, an operating margin of 44%, net income of $5.1 billion and a share price plummet of 17% overnight; Facebook has not impressed investors with its latest quarterly results.

As it stands, Facebook is still one of the dominant players in Silicon Valley and one of the most influential brands in the global economy, but it appears investors are falling out of love with the social media giant, perhaps indicating long-term prospects of the business are not as rosy as CEO Mark Zuckerberg and his cronies would have you believe.

“Our community and business continue to grow quickly,” said Zuckerberg. “We are committed to investing to keep people safe and secure, and to keep building meaningful new ways to help people connect.”

Facebook will continue to make billions in profit over the coming years, but this does not seem to be enough for investors. Many seem to be investing in the unbelievable profit increases Facebook has been returning through the last few years, though the room for growth appears to be limited. How many more Facebook accounts can be created in the Western markets? It might not be long before Facebook starts posting growth figures which are more in line with the norm.

The statistics are not necessarily the worst for the moment, daily active users were 1.47 billion on average for June 2018 (missing analyst expectations however), an increase of 11% year-over-year, though the laser focus of profitability is coming back to bite Facebook. Yes, it is a sensible idea to create dominance in one area in the early years, though diversification is key for long-term success. Facebook’s business model surrounds serving ads to users, but there will be a glass ceiling before too long.

Looking at the individual markets, growth was led in India, Indonesia and the Philippines, while the US and Canada remained flat. Europe saw a decline in both daily and monthly active users. The European market is also proving to be a difficult one with new GDPR. Advertising revenues were up slightly on the continent, perhaps indicating the worse is yet to come as the realities of data privacy sink in.

For growth to continue, the number of subscribers needs to increase, especially in the affluent Western markets which are attractive to advertisers looking to demonstrate ROI. Once the number of subscribers starts to flatline, Facebook has a choice; sacrifice growth in advertising revenues or kill user experience by attempting to sweat assets and increase advertising revenues per user. Neither will be an attractive idea to investors.

Instagram is one area which is an immense success for the business. There are currently 25 million Instagram business profiles and 2 million advertisers, as well as increased engagement from the user base, 400 million people are using the Stories feature. The big question is whether Instagram can compensate for the anticipated slowdown in the Facebook core business, and if lessons can be learned. Instagram growth is all well and good, but Facebook should demonstrate it has created new opportunities to ensure it doesn’t head towards the same overly-commercialised position as the core site. Younger generations are switching off the core Facebook platform because of a degradation in experience.

The slowdown has been expected for some time, the Facebook business model does have a limited scope, but this is not the end of the world. This is simply a new dynamic for the Facebook business. Shareholders will have to be engaged and expectations managed, focusing more on the profitability of the business not simply the gargantuan growth figures. How Facebook adapts to the future status-quo will decide the success of the business; simply saying everything is okay will lead to disaster.

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