Recent earnings revisions – following a worldwide privacy scandal – have sparked fears that Facebook, which is likely a prominent part of your clients’ global equity portfolios, will be sent into a tailspin. Should you get out now or stay the course?
The social media giant saw about US$120 billion wiped off its market value about two weeks ago following the release of its Q2 results. These results revealed disappointing revenue, slowing user growth and diminished future earnings expectations – this further compounded the scandal in which Facebook has been involved after it was revealed the company had inadvertently released users’ data to a political consulting firm involved in the Trump presidential campaign.
Assessing the damage
Urs Raebsamen, senior equity specialist for the UBS Global High Conviction Fund, says the reduced ad revenue growth continues a “trend of greater than expected deceleration in ad revenue,” which initially caused the stock to trade down by 7-9%.
Following this, Raebsamen explains, Facebook’s investor conference call guided to high single-digit revenue growth deceleration for the next two quarters. “The reasons they gave for this continued deceleration,” he says, “were currency effects, a transition to more ‘stories’ ad format sales which monetise at a lower rate than news feed ads and more privacy options, which, if users opt in, may affect Facebook’s ability to monetize its user base.”
Raebsamen also points to the effects of the European Union’s General Data Protection Regulation (GDPR), which aims to standardise guidelines for companies accessing users’ personal data.
Future growth
After this, Facebook’s chief financial officer, David Wehner, advised that the company’s operating margins are expected to compress over the next several years while they invest in data and privacy initiatives, virtual reality and video content.
“Based on these comments regarding continued revenue growth deceleration,” Raebsamen says, “the stock traded down over 20% from its closing price in the aftermarket. Our long term model had assumed significantly lower revenue growth than current levels, but not the margin compression into the mid-30s range.”
Time to exit?
If you and your clients are invested in global equities – US shares in particular – it’s likely Facebook is represented in there. At the time of writing, it’s the fourth-largest stock of the top 500 US companies. As one of the biggest companies in the world, it’s now part of our daily lives and plays a key role in how we interact with each other and consume news content.
Given the above, though, is the model broken? Not according to Raebsamen, who believes that the recent global focus on data privacy means Facebook is “using this period as an opportunity to invest in its technology platform as well as data privacy and security in attempt to show regulators that it will be a better corporate citizen.”
Raebsamen says UBS maintains Facebook’s earnings growth can hover around 10% in the mid-to-long-term, and as a result it remains an “attractive opportunity.”
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