02/08/2018
Why Facebook and Twitter both fell over 20% last week.
It is reporting season once again in America, as companies report their 2nd quarter (April-June) results to the market. What caught our attention was the performance of the world’s largest social media companies – Facebook and Twitter – that both saw their share prices fall despite reports that didn’t seem that bad.
In this blog post we have a look at what happened and why.
The first of the companies to report was Facebook, that reported numbers slightly below analyst estimates. The company reported revenue of $13.23 billion (estimates were $13.36 billion), daily active users of 1.47 billion (estimates were 1.49 billion), and earnings per share of $1.74 (estimates were $1.72).
While these numbers seem impressive, and in line with estimates, it wasn’t enough for the market. Even the fact that one-fifth of the world is a daily active user (one-fifth!) wasn’t enough for the market. Facebook’s stock dropped as much as 24%, losing over $120 billion of value in the process.
So, why was the market not happy? This is mainly to do with expectations. As you can see from Facebook’s chart above, the stock has been on a tear since April this year. Investors were expecting big things to justify such a high share price, and Facebook failed to deliver.
In particular, European user numbers were down from the previous quarter and additional staff hires to help confront fake news eats into profitability. Facebook also warned of slower revenue growth (note: slower growth, but still growing). This is mainly because of added privacy features (that will make targeting advertising harder) and a focus on Facebook Stories (that has a lower level of monetisation).
In all, Facebook is almost unthinkably dominant. Across all of its platforms (Facebook, Instagram, Whatsapp) it has 2.5 billion monthly active users. That’s just under one-third of the world’s population. However, it gets harder to keep up your user growth rates when one-third of the world’s population is already a user. So even though Zuckerberg had a bad day (and lost $16 billion of his net worth in the process), we think he’ll be back at the top of the rich list before we know it.
In more bad news for social media platforms, Twitter’s Q2 report saw the company’s share price fall just over 20%. Some of the key metrics Twitter reported were: revenue $711 million (estimates were $696 million), earnings per share 17 cents (estimates were 17 cents) and monthly active users 335 million (estimates were 338 million).
So Twitter brought in more money (revenue) than was expected, and reported a profit (earnings) in line with expectations – so why the massive share price fall? In this case, it was mainly to do with user numbers.
In Q1 (so 3 months ago) Twitter reported 336 million monthly active users. This declined to 335 million in this quarter. Losing 1 million out of 336 million doesn’t seem like that big of a deal, but these companies are priced for their future potential. Investors aren’t buying Twitter at its current price for the money it is making today. The price they’re paying shows they expect big things in Twitter’s future. If Twitter is losing users today – then those big things may never come about – and investors need to adjust their expectations accordingly.
So why the drop in users? The company pointed to not renewing a number of SMS Carrier relationships, increases in privacy regulations due to laws out of Europe and changes to improve the health of the platform. The company also warned that Q3 user numbers will likely be down further as they’re currently purging fake accounts – so investors expect less users ahead.
Twitter had been an exciting stock recently. It was finally profitable and had grown large enough to enter the S&P 500 index (the largest 500 publicly traded stocks in America). Unfortunately, now it is back to where it was a few months ago.
The good news for Twitter is that daily active users grew 11% (although they didn’t provide the numbers of daily active users) and revenue is up 24% from this time last year. So if Twitter can continue to convert monthly active users to daily active users and in doing so increase the revenue per user, it still has plenty of room to grow.
What do we take away from this?
The market can be very short term at times, and companies need to meet quarterly estimates or their stock will get punished. However, quarterly reporting isn’t the be all and end all, and both companies will continue to fight on with large user bases and significant opportunities in their future. We’re interested to see how they go, and if they can continue to grow.