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Facebook shares plunge 20% at the start of trading


Would You Unlike Facebook?

There seems to be doom and gloom news circling around Facebook Inc’s stock recently. The company, also known as the “King” of Social media has seen about 20% of its share price wiped off after the market closed on Wednesday. The reason behind the sell off is this:

Firstly, the company in its quarterly filing announced that its revenue growth rate had missed the expectations of analysts and that user growth had showed signs of slowing down.

This has caused the share price to drop by about 7% immediately. During the conference call with analysts, the Chief Financial Officer (CFO) of Facebook, further warned the revenue growth will continue slowing down causing the share to fall plunge even more. In total, Facebook has seen the trading value of its share drop by almost 20% in one day alone!

Once again, there are a lot of fear going on in the market. But is this danger? Or is it actually an opportunity? Let’s take a look at the facts.

Facebook is one social media platform that many of us both know and use today. In fact, you are probably led to this article via a post on Facebook itself.

From the days of its IPO, Facebook has seen its share price steadily climbing over the years. If you had purchased the share at its IPO price of $38, you would have made a gain of up to 572% before the recent plunge. That’s about 30-40% compounded returns every year!

But the more important question is, how exactly is Facebook Inc performing as a company? To understand this, we need to take a close look at one of the most important figures produced by the company – Its profits.

(Source: Facebook Inc Annual Report 2017)

As we can see, since 2013, revenues and profits of the company have been climbing exponentially. In fact, the earnings generated by every share has been increasing significantly as well. Meaning to say that each share is quickly becoming more and more valuable. It is no wonder its share price rose significantly as well!

But according to the news and CFO of Facebook, growth of the company’s revenues and profits are apparently slowing down, causing investors to quickly lose confidence on the stock and sell it down.

So, lets dive in a little deeper to have a better idea.

(Source: Facebook Inc 2018 Quarterly Reports)

Above is the reported results of Facebook Inc for the 2nd Quarter of 2018. Revenues grew by a massive 42% to $13.231 billion compared to last year. Net income and earnings per share grew by approximately 31%. Therefore, as an investor, you can see that each and every share of Facebook that you are holding is becoming more valuable. However, if you compare this results to that of last year:

(Source: Facebook Inc 2017 Quarterly Reports)

The results produced in the same quarter last year are even better! Because of this, many investors are dumping the shares in fear that the company is becoming worse. But is this really the case?

Some facts and questions to ponder before you are able to decide if the recent plunge in Facebook’s stock price is an opportunity:

1. Why did revenues growth rate fall?

In the same quarter in year 2017, quarterly revenue grew by 44.8% from $6.4 billion to $9.3 billion. However, in year 2018, quarterly revenue grew only by 41.9% from $9.3 billion to $13.2 billion. Wall Street expected a growth rate of 43.3%. Therefore, they were disappointed. The CFO of Facebook further mentioned to expect growth rates to fall further which made the situation worse.

However, Imagine if you started with $100 in the bank account, you could easily double that amount to $200. This is because all you needed to do is to generate another $100. But what if you had $100 million in the bank account. How easy would it be to double that amount to $200 million? You would need to find a way to generate another $100 million. Which would be easier to generate? If that is only $100 million, Facebook Inc had to deal with multi billion dollars! As the company gets bigger, do you believe it gets harder to grow the company?

2. Why did growth in profits fall?

Profits growth rates is only 31% for the recent quarter compared to 86% in the same quarter last year. The reason as cited by various news sources is due to recent investments to bring new services to their users such as Instagram TV (IGTV) and also to enhance their security system in the wake of the Cambridge Analytica Scandal that hit them previously. Therefore, you need to ask yourself an important question, why is the company incurring all these expenses? Are they merely costs to maintain the business operations? Or are they costs to make the business better in the long term?

Will the company continue being profitable over in the long term?

Facebook generates majority of its income by selling advertisements to companies. Companies will only purchase advertising services if Facebook has a large audience for them to target. Therefore you need to ask yourself; will many people leave Facebook because revenues and profits generated by the company didn’t grow as fast as Wall Street’s expectations?

In fact, if you take a look at essential data, you will find that Daily and monthly active users actually increased by 11%. And to date, Facebook has more than 2 billion users on its platform. Will advertisers cut their advertising budget on Facebook ads?

(Source: Facebook 2018 Quarterly Report)

Answering these questions honestly to yourself can help you come to a conclusion whether the recent drop in share price is a buying opportunity.

So the question now is, will you like Facebook?