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Facebook’s Worst Day Ever Isn't Over Yet

FB

Techland is reeling as yet another FANG stock bites the dust—this time, it’s a major Facebook fall from grace.

First, it was Netflix Inc. (NASDAQ: NFLX), whose shares dropped nearly 10 percent about a week ago after the company failed to meet subscriber growth projections during Q2 earnings.

And now, Facebook Inc. (NASDAQ:FB) stock is on pace for its worst single-day stock drop in its six-year history as a public company. FB dropped like a rock in Thursday morning trading, crashing nearly 20 percent and wiping off $130 billion from its market cap at market open.

The massive selloff comes just hours after the company reported Q2 earnings that exceeded consensus earnings estimate but fell short of revenue expectations.

But what is really spooking investors is the company’s warning about decelerating revenue, tightening margins and slower subscriber growth amid ongoing privacy policy changes, especially in Europe.

From being one of the better-performing stocks in the S&P 500, FB stock is now languishing in bear territory.

(Click to enlarge)

Source: CNN Money

Revenue Deceleration

Facebook CFO David Wehner told shareholders to expect "revenue growth rates to decline by high single-digit percentages from prior quarters" for their third and fourth quarters. He gave the reason for slowdown as:

"We plan to grow and promote certain engaging experiences like Stories that currently have lower levels of monetization, and we are also giving people who use our services more choices around data privacy which may have an impact on our revenue growth…”

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He also mentioned that currency fluctuations would impact negatively on earnings during the latter half of the year after helping them during the first half.

Weaker Margins

Nothing perhaps better explains the massive crash by FB stock than what the CEO said about future margins. Wehner warned that the company expects significant margin compression, with operating margins tumbling around 10-percentage points from 44 percent in Q2 to mid-30s in the coming quarters.

He did, however, try to soften the blow by pointing out that the tightening would be the result of investments in new products and broadening markets. The new products to which he was alluding include IGTV—a new video platform designed for long-form video content--plus some other capital expenditures that he conceded would not immediately translate into revenue dollars.

There are few things that investors hate more than a slowing topline and shrinking margins.

By this point, FB stock was pretty much done for. Investors tend to punish companies whose profitability drops by as little as 40-50 basis points—an entire 10-percentage points is sacrilege.

Effects of Privacy Changes

Facebook has been making several privacy policy changes in the wake of the infamous Cambridge Analytica fallout. Some of those changes have been forced by the recently enacted General Data Protection Regulation by the European Union.

GDPR, as they policy is known, consists of a set of rules that give users more control over their private data, including the right to prevent companies like FB from sharing their data with third- parties.

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And GDPR is already taking a toll on FB. The company reported fewer daily active users in Europe, from 282 million during the first quarter to 279 million for the second term.

(Click to enlarge)

Mind you that drop has come just a couple of months after GDPR was enacted. Facebook COO Sheryl Sandberg admitted that was a potential pain-point in the future:

"GDPR hasn't had a revenue impact, but we also fully recognize it wasn't fully rolled out. As we look further out, we recognize there's still risk and we're going to watch closely," the COO said.

FB stock managed to claw back lost ground after the Cambridge Analytica privacy scandal earlier this year. But this next climb is going to be one very tough slog.

By Alex Kimani for Safehaven.com

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