Is the market rout at Facebook Inc. just an extreme example of short-term thinking by stock investors?
Even with new, lower revenue growth expectations, Facebook FB, -0.78% is still one of only 11 companies in the S&P 500 that have notched year-over-year revenue growth of 20% or more in the last eight quarters.
Facebook shares slid 20% Thursday, after its CFO shocked investors by saying revenue growth would start to decelerate, from a 42% growth rate in the current quarter to about 20% by the end of the fourth quarter.
It could be the largest single-day loss of market cap in U.S. stock market history. But the company’s fundamentals—its cash position, outlook for new products and revenue sources, and willingness to invest—are still very strong.
Instinet’s Mark Kelley downgraded Facebook’s stock to neutral from buy on Thursday, but he’s just one of a handful of analysts to rate the stock at anything but a buy. Only five of the 47 analysts who cover Facebook’s stock have the equivalent of hold ratings and only two have sell ratings.
Read: Facebook’s downbeat forecast leaves most analysts miffed at Zuckerberg and still upbeat on the stock
On the company’s earnings conference call, Chief Financial Officer David Wehner was tasked with giving the bad news for the second half, immediately sending the company’s shares down in the extended session.
See: Opinion: Facebook pays for all its mistakes at once, and it is a big bill
Read: The uncomfortable question Zuckerberg kept facing: Is Facebook a monopoly?
Wehner said there were several factors contributing to a lower revenue outlook. He expects currency to be a “slight headwind in the second half versus the tailwinds we have experienced over the last several quarters.” There are plans for products like Stories that currently have “lower levels of monetization.” Finally, more privacy concerns have resulted in the requirement to give users “more choices around data privacy” which Wehner says could impact revenue growth.
See also: Facebook’s current woes exacerbated by six-year-old FTC settlement
Still, Facebook is one of only 11 companies in the S&P 500 that enjoys revenue growth of more than 20%.
The others are: ABIOMED, Inc. ABMD, -3.91% ; Adobe Systems Incorporated ADBE, -2.72% ; Align Technology, Inc. ALGN, -2.55% ; Alphabet Inc. GOOG, -2.35% ; Amazon.com, Inc. AMZN, +0.51% ; Applied Materials, Inc. AMAT, +2.40% ; Netflix, Inc. NFLX, -2.17% ; NVIDIA Corporation NVDA, -1.11% ; Pioneer Natural Resources Company PXD, -1.29% ; and Salesforce.com, Inc. CRM, -2.48%
Facebook’s results are still relatively strong, whether looking at them on the reported basis required by the Securities and Exchange Commission, GAAP (Generally Accepted Accounting Principles), or on a non-GAAP adjusted basis.
The company generated $2.8 billion in free cash flow in the quarter, which was down 28% from the second quarter of 2017, but is still up slightly for the six-month period. The company ended the quarter with approximately $42 billion in cash and investments, about the same as at the end of 2017.
Wehner said he anticipates that total expense growth will exceed revenue growth in 2019 and that over the next several years, operating margins will trend toward the mid-30s on a percentage basis.
Mobile advertising revenues are now about 91% of advertising revenue, up from approximately 87% of advertising revenue in the second quarter of 2017, which is positive. GAAP advertising revenue also grew 42% in the second quarter compared with the same quarter last year.
Additional reporting by Philip van Doorn.
