Facebook Inc.'s second-quarter earnings results triggered a stock sell-off July 26 that wiped out billions in the company's market value, but several analysts called the response an overreaction, reiterating their view that the company's long-term growth trends remained solid.
Facebook's shares plunged nearly 19% to close at $176.26 on July 26, wiping out over $100 billion in the company's public market value. The rout marked the company's biggest one-day drop since March 19, when Facebook lost just over $30 billion in value shortly after news broke about a data privacy scandal involving now-defunct analytics firm Cambridge Analytica LLC.
Facebook on July 25 reported slower-than-expected revenue growth for the quarter and predicted similar growth deceleration during the rest of the year. The company reported a 41.9% year-over-year gain in revenue, up to $13.23 billion, versus consensus expectations of about $13.35 billion, according to S&P Capital IQ. That compares to $9.32 billion in revenue reported in the second quarter of 2017.
CFO David Wehner on a July 25 earnings call attributed the slowing growth to "currency headwinds" and new privacy options for users, saying that new ad formats, including Facebook's Stories feature, were not collecting the same amount of money as ads shown in the Facebook News Feed.
Chairman and CEO Mark Zuckerberg said on the call that the company's increased investment in security following recent privacy concerns will "significantly impact our profitability" but added, "[it is] our responsibility to keep people safe."
As anticipated, user figures in Europe fell slightly during the quarter as a result of the European Union's General Data Protection Regulation, or GDPR, sweeping new privacy regulations that took effect in May.
BTIG analyst Rich Greenfield said in a report that investors are responding too harshly to the social media giant's results. He views Facebook's investments in security as a strategy that will pay dividends in 2019 and beyond.
"Great companies have strategic goals and know when to sacrifice short-term profits to maximize long-term value creation," Greenfield wrote.
While disappointing ad sales for the company's Stories feature was a factor in Facebook's slowing revenue growth, Greenfield said investing in the more visual-oriented Stories format — which focuses on user-generated photos and videos versus text — is a smart long-term move as it will encourage users to spend more time on the platform.
Addressing the lowered guidance, Gene Munster, a managing partner at venture capital firm Loup Ventures, said in a research note that Facebook has a history of tempering revenue growth and expense expectations "only to turn around and exceed those expectations the following quarter."
"Given the magnitude of the guide down, along with Facebook's guidance history, this suggests the company could have been overly conservative," Munster wrote.
RBC Capital Markets analyst Mark Mahaney said Facebook's growth potential is still intact, as its "aggressive investments" are improving platform security and creating future revenue streams in virtual reality and augmented reality.
Mahaney said his research suggests there has been no "material change" in advertisers' views of the attractiveness of Facebook platforms.
GBH Insights analyst Daniel Ives said in emailed comments that Facebook's "jaw dropping" guidance places its shares under "massive pressure," but he remains positive on the company's outlook over the next year.
Facebook's results sparked the ire of shareholder group Trillium Asset Management LLC, which filed a proposal after the company's earnings report calling for CEO Zuckerberg to be removed from his role as the company's chairman.
Trillium in its proposal cited Facebook's "mishandling" of several controversies, including its data scandal and Russian meddling in U.S. elections.
The activist investor, which owned 73,305 shares in Facebook worth roughly $12 million as of December 2017, submitted a proposal last year to establish a risk oversight committee within Facebook's board to guard against fake news, among other issues.
While Zuckerberg owns only about 16% of Facebook shares, he controls 60% of voting rights, making it unlikely for proposals to pass without his approval.
Facebook's top 10 largest common shareholders have mostly held or increased their holdings over the past year through platform changes and public concerns about data privacy and security at Facebook. Zuckerberg has sold off about 10% of his holdings over that period in keeping with a plan to fund various charitable initiatives, which he announced in 2017.