Earnings Meltdown Puts FB Stock and TWTR Stock on Sale

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$140.0 Billion in Lost Market Value

The weather in Silicon Valley must be strange at the moment, because while the majority of tech stocks are soaring, dark and ominous clouds hang over Facebook, Inc. (NASDAQ:FB) and Twitter Inc (NYSE:TWTR).

Second-quarter earnings were terrible for both FB stock and TWTR stock. Combined, they lost approximately $140.0 billion in market value.

What’s harder to gauge is whether the slump is permanent or not. In this article, we’ll assess the possibility of a resurgence, though I should warn you that more time is spent on Facebook than Twitter. Also, these are big and complicated stocks, with countless factors to consider, so I’ll limit my analysis to what caused the catastrophe in the first place.

Let’s start with Facebook stock, the blue line on the chart below.

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Chart Courtesy of StockCharts.com

FB Stock: GDPR Takes Its Toll

The last two years have been a nightmare for Facebook CEO Mark Zuckerberg.  As news poured forth about Russian bots and Cambridge Analytica data leaks, Facebook took a beating in the national media. Zuckerberg was dragged in front of Congress and made to answer awkward questions about his role in debilitating democracy.

However, there was one silver lining: Facebook’s business was boomingInvestors were willing to forgive anything so long as FB stock moved up and to the right. “Yes, Facebook is neck deep in scandal, but at least shareholders are making money,” was the general thinking.  

That all changed with Europe’s introduction of the General Data Protection Regulation (GDPR). It is a packet of laws which governs the storage, analysis, and selling of user data. It changed everything.

The GDPR turned the anti-Facebook/anti-tech fervor into something real, something that could be enshrined into law. And that terrified the market.

Zuckerberg tried to front-run the GDPR all through 2018. In January, for example, he announced that Facebook would show more content from friends and family rather than from content developers, even if it cost them money.

“We’re making a major change to how we build Facebook,” Zuckerberg wrote in a January 11 post. “The first changes you’ll see will be in News Feed, where you can expect to see more from your friends, family and groups.” (Source: Facebook post, Mark Zuckerberg’s Facebook page, January 11, 2018.)

“Now, I want to be clear: by making these changes, I expect the time people spend on Facebook and some measures of engagement will go down,” he added. “But I also expect the time you do spend on Facebook will be more valuable.”

Consider the words “engagement will go down.” Even if you’re not in the habit of decoding corporate language, that is an obvious wink at slower revenue growth. Investors found this hard to believe, though, because Facebook has been such a reliable stock in recent years.

Fast-forward to this earnings announcement. Facebook reveals that revenue growth has slowed from approximately 40% to somewhere closer to 20%. Markets freak out. FB stock loses more than one-fifth its value in a single trading session, and everyone acts surprised.

This doesn’t mean Facebook’s core business is in trouble, though. Not by a long shot. Sales were still 42% higher than the same quarter last year, so, to be clear, the trouble is with decelerating growth, not negative growth.

If you need a metaphor, think of Facebook as having exited a highway where startups whip along at 100 miles an hour. Imagine it’s now floating along the comparatively slow streets of Blue Chip Valley, praying that an on-ramp to growth is somewhere up ahead.

Other than the revenue slowdown, markets also noticed that Facebook added fewer users than in quarters past. Of course, this shouldn’t come as much of a surprise, seeing as Facebook has 2.23 billion monthly users; there simply aren’t any users left to add.

One final note on the FB stock crash: expenses are going way up, presumably because Facebook is hiring a lot of staff to weed out offensive content, as well as spending a fortune on lawyers and lobbyists.  

Why Did TWTR Stock Crash?

Even though GDPR played a role in the TWTR stock crash, investors were more interested in the purge of three million fake accounts.

After all, it’s an open secret that Twitter has millions of fake accounts. We all know that bad-faith actors use these accounts to generate scandal and controversy, and that Twitter would turn a blind eye to such practices.

But now that Russian election interference is such a hot button issue, Twitter figured it’s better to be seen doing something about these accounts. So they started wiping out users en masse.

Getting rid of these “bots” led to negative user growth on the platform, which, as I said before, is a death knell for social media companies. Investors typically want to see more users, more engagement, more everything.

That’s what makes this crash so ironic. Twitter was trying to appease its critics, but instead it ended up losing 20% of market value in a single day.

Investors don’t seem to care that Twitter turned a profit for its third consecutive quarter, or that advertisers are paying attention to the platform. All they see is 335 million monthly users, down from 336 million the previous quarter.

Here are some other factors no one’s talking about:

  • Revenue Growth: +24% year-over-year
  • GAAP Net Income: $100.1 million   
  • GAAP Net Margin: +14%
  • Ad Engagement: +81% year-over-year
  • Stock Performance: +31.6%

Does it make sense to ignore these numbers? I don’t think so, given that even with its recent tumble, Twitter stock is still positive for the year.

Analyst Take

I think investors overreacted to Facebook’s earnings. Don’t get me wrong, I believe data privacy issues will create long-term issues for FB stock, but that doesn’t mean it should have lost 20% of its market value.

Facebook is an earnings beast with two aces up its sleeve: Instagram and WhatsApp. It’s going to keep making a ton of money regardless of the tepid guidance Zuckerberg provided on his earnings call, so don’t buy the bearish narrative (at least for the short term).

As for Twitter stock, it’s business is (finally) ascendant. The company is making more money than ever and it’s investing in growth. That’s a tough balancing act.

So, to sum up, I’m worried about the GDPR wreaking havoc on social media stocks, but not enough to bet against FB stock and TWTR stock. They are simply way too attractive at their reduced prices.