By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets
Founded by Mark Zuckerberg in February 2004, Facebook (NASDAQ:) is the world’s largest social network. On Thursday, after the earnings report, Facebook stocks went down by almost 20%; the company’s revenue was higher compared to the previous quarter, but the report did not meet expectations. In fact, this happens quite often, but before it did not lead to such plunges. Let’s find out what caused such as a massive selloff. In order to understand it, we’ve got to analyze the major negative events around Facebook since its IPO in 2012.
In June 2013, evidence came that ANB had been gathering information on its users, including their messages and location. The community well understood that such things are common on the web, although companies don’t tend to declare it openly, so that’s why Facebook stocks did not react to this news at all.
A month later, Facebook published a report saying the company had received over 25,000 requests to clarify data collection from 38,000 users; these reports had come from various governments since January 2013, and over 50% of them were accepted and processed. In this case, the market did not show any negative reaction either. In fact, it was quite the reverse, as shares skyrocketed by 26% in June, after the earnings report, and continued rising in August.
In May 2016 Facebook was accused of pubic opinion manipulation, as there was interference in the news algorithm by company employees. The news selection editors were then fired, and new automated algorithms were brought in to replace them; those were criticized afterwards too, though.
Facebook was also accused of intellectual property infringements, unethical attitude towards users, spam, and illegal data processing, but none of these pieces of news could do well enough to prevent the stock from growing. It looked like investors were okay with the company not caring about the ethics, as long as it acquired more users and its profits were high.
In 2018, the Cambridge Analytica scandal, where Facebook was again accused of illegal data processing, triggered a 23% drop in share prices.
In 2015, Aleksandr Kogan created his thisisyourdigitallife app, where he got information on 50 million Facebook users, which he then submitted to Cambridge Analytica that afterwards used them in the US presidental elections.
The UK and the European Parliament then requested data protection information from Zuckerberg, while the US Federal Trade Commission started its own investigation. The stock plunge led to serious losses in the case of some investors, and those issued a legal action against Facebook saying the company had been aware of the data leak but had not taken any appropriate measures and had not admitted it in public.
Of course one can understand why Facebook management feared doing so. Trump was then the synonym of ‘Russian spy’, with Russia being accused of interference in the US elections. If Facebook had admitted Cambridge Analytica had been able to influence the elections, it would have been a suicide.
However, as time passed, the scandal was no longer in the minds of investors. Combined with the Trump rally, US stocks were surging again.
Unfortunately for Facebook management, the scandal did its job a bit later. Rumor had it that some dissatisfied investors were planning to make Zuckerberg resign, although it never was easy, as he was both the Executive Director and the Board Chairman.
Right after that, the UK government announced they were going to fine Facebook $663,000. While this won’t influence the financial state of the company, it was feared that similar measures would be taken by European Parliament and US Congress, where the amounts may significantly higher.
It did not take long for the European Parliament to respond, indeed, as on May 25, the famous General Data Protection Regulation (GDPR) came into effect. This regulation imposed stricter rules of data collection and using them without users’ knowledge. Any GDPR infringement may cost the company 4% of its yearly revenue.
Facebook is headquartered in Dublin, so many of its users (except for US and Canadian citizens) are now governed by this law. In fact, from over 2.0 billion users registered on Facebook, 1.9 billion are under the EU jurisdiction, which makes GDPR a very important issue for the company.
It appeared that Aleksandr Kogan, who created that thisisyourdigitallife app,submitted the data to Cambridge Analytica just let Facebook down. While the data had been always collected this way, this time they were used illegally, which led to those new restrictions.
GDPR is a strict rule, but it does not completely forbid companies from gathering information on users; currently, users are asked at sign whether they agree to submit their data, and in case they don’t, they just won’t be able to log in. So, in fact, nothing has changed much, except for the European Parliament getting the opportunity to fine companies for the new regulation infringements.
So, here’s what we finally have: the scandal did not influence Facebook itself, but led investors to panic. They may even claim their loss through a legal action again, which is quite a common thing in the US. The first action was actually already issued by a certain James Kakuris on July, 27.
Meanwhile, the financial state of Facebook, Inc. needs analyzing to make this puzzle more complete.
Over the last three years, the company’s earnings increased quarter to quarter. Q1 is always a bit of lackluster each year against Q4, but this is quite understandable, as consumer demand increases before Christmas, and the advertisers tend to sped more money.
Among all earnings reports, there was only one when Facebook did not meet expectations. This time, earnings reached $13.23 billion, while the expectations were at $13.36 billion.
If we take all the emotions out and leave only the figures, we’ll see the revenue increased by 42%, the number active users went up by 11%, and ad revenue skyrocketed y 91%, QoQ.
The number of daily users increase is indeed somewhat lackluster, but this is mostly because of the GDPR. Besides, Facebook is reported to have reached its maximum active user number for now and is trying to ‘recruit’ users in other locations, where internet usage isn’t as active. However, the total number of users is at 4 billion for now, which means there is still some more room for growth.
In November 2018, the US will be electing Congress; for Facebook, this means they will have to spend more on security and controlling the damage of the data leak, whether the management wants it or not. This is why the costs are expected to grow by 50% in Q3, which will lead to the revenue going down in both Q3 and Q4.
The bottomline: the company still looks healthy and good for investing, but the quarterly earnings will be going up slower than they used to. Besides, in the lights of the recent fall, more negative news may appear, and this may be pushing prices downward. For now, it may be feasible to just watch how it goes and be ready to buy Facebook low, if this is possible.
Technically, the shares are trading below the 200-day SMA. It was the same after that Cambridge Analytica scandal, but then the price consolidated around the support at $150 and $160, and then went up, with volumes growing during the SMA breakout, which became an additional bullish signal.
This time, the price may well consolidate again before moving directionally, after which investors will be finally able to predict where exactly it will go.
Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.