Facebook's Stock: A Classic Wall Street Overreaction
In typical Wall Street fashion they've immediately overreacted to the bad (same story just reiterated) and hit the sell button on their Facebook stock, causing a massive drop in the stock price. Wall Street has it wrong and is overreacting to news we - you, me, and Wall Street - already knew.
Facebook's revenue for Q2 2018 increased by 42% from Q2 2017. In most any other case this would be cause to celebrate. Not Wall Street, not in 2018. Wall Street has instead decided to focus on Facebook missing revenue expectations by $120 million and the slowing revenue growth announced by Facebook.
Facebook has been in the news a lot the past several months, usually on the defensive because of the U.S. election manipulation by Russia via Facebook and the Cambridge Analytica mess. I don’t want to make excuses for Zuckerburg and the crew but they were a bit distracted the past few months, yet they still grew revenue by 42%.
After the Cambridge Analytica event Facebook told us all that they were cutting back on ads and refocusing on the person to person communication and communities that made Facebook great at the start. So an expected slow down in revenue is nothing new, we were told this months ago.
What Analyst are missing
Facebook is like a highly rated television show and after years online and impressing and gaining fans it’s topped out, and that’s not a bad thing. Facebook however is still a prime place to advertise. Facebook's management discussed an ad campaign during their earnings call.
“M&M's UK recently used mobile-optimized five-second video ads on Facebook and Instagram to introduce M&M's Mix, a bag of three kinds of M&M's in one. Their campaign worked, driving results not just for their new product but for the brand overall. Their sales increased by over 10% and 80% of that came from households that had not bought M&M's in the previous 26 weeks.” Q2 2018 FB earnings call
Then there is the not so secret weapon, Instagram. Instagram continues to be a social media favorite and its biggest competitor is SnapChat (I’d put my money on IG everyday). On the earnings call Mark Zuckerburg revealed Instagram hit 1 billion actives. With the introduction of IGTV, Instagram is looking to grab some of YouTube's marketshare, which shouldn't be that hard. YouTube creators have been frustrated with the platform's lack of clarity and transparency lately. These creators are actively searching for new platforms and Facebook and IG just provided them with one.
Facebook remains a prime place to advertise. Instagram continues to be a social media favorite amongst users. Wall Street's overreaction to slowing growth has provided investors with a nice point of entry for a Facebook investment. Small investors shouldn't follow Wall Street, they should follow the money, and the advertising dollars are still going to Facebook and Instagram.