Facebook just had the worst day in stock market history

Devin Lawrence
July 28, 2018

The figure accounts for around a sixth of his total net worth.

Facebook Inc.'s scandals are finally hitting the company where it hurts: growth.

Most of the 87 million user profiles affected by the data breach scandal were in the USA, but in Europe tighter rules on privacy have also had an impact. Those problems hadn't mattered to the success of the business - until now.

It's a staggering drop-off for Facebook and flies in the face of Wall Street's expectations. Chief Financial Officer David Wehner said he expects the decline to register "high-single-digit percentages" for both the third and fourth quarters.

Previously, since the announcement of the Cambridge Analytica debacle earlier this year, Facebook's stock price had fallen, but had since more than recovered. "It just seems like the magnitude is beyond anything we've seen, especially across a number of the tech (companies) we cover".

RBC Capital Markets analyst Mark Mahaney said the drop creates a rare buying opportunity for Facebook shares.

That "bombshell", as one analyst termed it, played into concerns on Wall Street that Facebook's model could be under threat after a year that has been dominated by efforts to head off concerns over privacy and fake news.

The second quarter of 2018 was the first full accounting period following the exposure of the Cambridge Analytica scandal in March.

"While those actions might take time to play out, it is still possible that threatened fines associated with GDPR to Facebook or other sellers of advertising could also have the effect of spooking advertisers into changing how they use data", said Wieser, who thinks the shares should be worth $140 U.S. - well below Thursday's level. "Facebook has also been sucked into the probe into alleged Russian meddling in the 2016 presidential election". A decade ago, nearly no one could have imagined that Facebook would have more than 2 billion users, much less that its family of apps - Instagram, WhatsApp and Messenger - would also count members in the billions. Worldwide daily user growth for Facebook's namesake service slid for its sixth straight quarter, bringing it to almost 1.5 billion users in the second quarter.

Revenue increased 4% to $13.2 billion in the quarter. Analysts projected $13.3 billion.

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Pivotal Research Group analyst Brian Wieser, who has a sell rating on the stock, says there are limits to growth in digital advertising, even for Facebook.

And Facebook warned that revenue growth from emerging markets and the company's Instagram app, which has been less affected by privacy concerns, would not be enough to fix the damage.

After having weathered all of the above, declining financial growth and static user growth has finally resulted in a major investor panic.

After the General Data Protection Regulation went into effect in Europe, Facebook started asking people to check their privacy settings and make sure they wanted to share certain kinds of data. Facebook disrupted some business by putting in place new rules to get all political advertisers to verify their identities.

Zuckerberg placed himself in the midst of yet another controversy after he received considerable backlash for justifying the lack of diligence Facebook demonstrated while handling offensive social media content posted by Holocaust deniers.

"Facebook stills owns two of the largest media assets in the world [Facebook and Instagram] and the two largest messaging assets in the world [Messenger and WhatsApp]", Mahaney said in a note to clients, adding that he sees "no material change in marketer views of the attractiveness" of Facebook platforms. That contrasts with ads reaching users who are on industry leaders Facebook and Alphabet's Google for a range of purposes.

Thoughts? Let us know what you think in the comments section below and stay tuned.

Zuckerberg's critics believe appointing an independent chairman would lead to better management, while Facebook argues this would create "uncertainty, confusion, and inefficiency". The company doesn't break out Instagram's revenue. Zuckerberg emphasized the investments the company has made to improve safety and security on the platform.

On Thursday afternoon, Facebook watched its capitalization drop by $119 billion, lowering its valuation to $510 billion, which represents a 19 percent drop, according to CNBC. That surprised investors because of the belief that the new laws wouldn't hurt revenue. The company also reported a second-quarter profit of $2.5 billion (roughly Rs. 17,100 crores), its largest ever.

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