Wall Street Begins to Unfriend Facebook
Yesterday (July 25th) Facebook announced its Q2 earnings and the results were not what the big financial speculators were looking for. Revenue for the quarter was $13.32 billion versus the $13.36 billion consensus estimate. Global daily active users (DAUs) was 1.47 billion versus the consensus estimate of 1.49 billion. North American DAUs — the most valuable users for the platform — were 185 million versus the 185.4 million consensus estimate. Even European DAUs — the second most valuable group of users for Facebook — were down with 279 million versus the consensus estimate of 279.4 million. After hours trading sent the Facebook share price down 20%, which, if not recovered in today’s trading, will cost the company $123 billion in market cap value.
Facebook, one of the founding members of the FANG (Facebook, Apple, Netflix, Google) group of companies, is learning the hard way that a market that overvalues businesses can also flip and suddenly undervalue them.
Facebook: the facts versus the hype
Total revenue Q2 2017 to Q2 2018: In Q2 2017 Facebook generated $9.32 billion. In Q2 2018 it generated 13.32 billion. This is a year-on-year increase of 143%. Quarter-on-quarter growth was 10.6% on the $12 billion generated in Q1 2018.
Global DAUs Q2 2017 to Q2 2018: In Q2 2017 Facebook had 1.33 billion DAUs. In Q2 2018 it had 1.47 billion DAUs. This is a year-on-year increase of 11%. However, quarter-on-quarter growth was 1.5% from the 1.45 billion DAUs in Q1 2018.
North American DAUs Q2 2017 to Q2 2018: In Q2 2017 Facebook had 183 million DAUs (North America). In Q2 2018 it had 185 million DAUs. This is a year on year increase of 1.1%. However, quarter-on-quarter growth was 0%.
European DAUs Q2 2017 to Q2 2018: In Q2 2017 Facebook had 271 million DAUs (Europe). In Q2 2018 it had 279 million DAUs. This is a year on year increase of 3%. However, quarter-on-quarter growth was a negative 1.1%, with Q1 European DAUs at 282 million.
Facebook is still doing well despite being called out for its ethical ambiguity
The biggest surprise yesterday was just how minimal the impact of the revelations about Cambridge Analytica’s US Electoral manipulation through fake news propagation, advertising revenues generated from state propagandists and the implementation of GDPR in the EU, was on the reported Q2 numbers. A company conceived in a university dorm has transformed in 14 short years into a behemoth, which probably determined the outcome of the second largest democracy on the planet, and generates 99% of its revenues from selling advertising on the back of user-generated content. Facebook is a money-making hegemon which continues to swallow up ad dollars alongside fellow FANG Google, to such an extent that the two companies accounted for 90% of all new digital ad revenue growth in the US in 2017, with Facebook taking 37% of the growth. In other markets its growth has been even more dramatic, with Facebook accounting for 61% of all UK digital ad revenue growth in 2017 (source: MIDiA Research.)
When it comes to tech stocks it’s all about the DAUs
Wall Street picked up on the numbers that truly matter: the declining quarter-on-quarter DAU’s for Facebook’s two most important markets. DAUs have come to the fore because Facebook is increasingly an app business and monthly active users, the previous tech yardstick for engagement, no longer applies in the mobile world which Facebook is moving into. If the app is not being used daily then it is failing and with Facebook touting its 2.5 billion (ironically MAU) user family of apps, Facebook is now being called out by shareholders anxious to ensure that they are not holding part of a social media asset that is failing to be social.
In the tech public company world, corporations live or die by user growth, and today Facebook is finding out what it means to be moving into post-growth in developed markets where 72% of its revenues are still derived.