Facebook (FB) is taking it on the chin after the company missed revenue estimates and caught investors and analysts off guard with some pretty awful financial guidance.
The stock initially traded lower after Facebook missed revenue estimates for the first time since the first quarter of 2015. Revenue growth of 42% was the slowest since the third quarter of 2015 and expenses were up 50%. As a result, second quarter net income grew 31% to $5.1 billion, which doesn't seem too bad.
However, another concern arose from the lack of user growth in developed markets. Daily active users were flat at 185 million in the US and Canada, a market that appears to be saturated. Daily active users actually fell by 3 million to 279 million in Europe. Facebook had said users would be flat or down slightly due to General Data Protection Regulation in Europe.
The stock was trading near the $200 level in the after-hours when management warned about its financial results going forward on the call.
Facebook said revenue growth would decelerate in the high single digit range sequentially over the next two quarters, implying revenue well below consensus. The company had previously said revenue would decelerate this year, but the Street didn't expect a slow down to that extent, especially after the company beat first quarter revenue estimates by 5% three months ago.
Facebook said it would prioritize its community over sales and profit growth in the beginning of the year and the guidance from last night finally quantified the company's new objective.
Management cited a focus on promoting new products like Stories (where there is lower monetization as marketers have yet o fully embrace the new format) and user privacy. The company also cited a foreign exchange headwind from the strong dollar.
Simply put, the company is no longer trying to maximize sales and profits near term, as they had been doing for many years. Management believes it will add value in the long term.
While reaffirming expenses up 50-60% for 2018, management said expense growth would outpace revenue growth next year.
Perhaps the most alarming statistic, Facebook said operating margins would trend towards the mid-30% range in the coming years. Operating margins were 50% last year and 44% in the second quarter.
While Facebook will still be growing the top and bottom line going forward, last night's outlook represented a seminal shift in the company's previously endless beat and raise custom.
Facebook still has a ton of things going for it, but last night's admission took analysts and investors by surprise, so the stock is being punished this morning.
Instagram is the most popular social media platform in the western world and Messenger and WhatApp are also proliferating with over 1 billion users.
Facebook is currently expected to grow EPS 14% this year and just 8% next year. That likely sets the bar low enough to allow the company to keep reporting upside in the coming quarters. Still, the profit machine has been tamed.