We do not build services to make money, we make money to build better services.
Facebook shares observed the worst day in its history to fall 19% on July 26, after presenting a report that disappointed participants, despite a growth in profits greater than expected (30 percent). The quarterly revenue growth of 50% was never going to last forever, but Facebook still has many opportunities in front. Talking about the failure of the company may be fashionable, but that simply will not happen given the numbers. With the new utility estimates, although more discrete, its P / U multiple estimated at 2019 is 18.0x vs. historical figures over 100x.
Investors have been concerned about the impact of the European Union's General Data Protection Regulation (GDPR), requiring companies like Facebook to update privacy policies and enact new practices to better protect European users' data from inappropriate use, in addition to continue to deal with the consequences of Cambridge Analytica that resulted in the data loss of tens of millions of users in unauthorized hands. This event negatively impacted earnings in the second quarter of 2018. European daily active users in June fell to 279 million, compared to 282 million in March. Facebook warned that the results in Europe of the third quarter of 2018 may be neutral or slightly low, but noted that "we do not anticipate that these changes have a significant impact on advertising revenues." In fact, Facebook's European advertising revenues continue to grow. What continues to stand out is the gap between user revenues between the United States and the rest of the world. In the second quarter of 2018, Facebook's average revenue per user was $ 25.91 in the United States vs. $ 8.76 in Europe. This difference, despite the disparate wealth between countries, leaves much room for improvement for Facebook in Europe.
Facebook also talked about its biggest investment until 2019. However, the company is certainly in a strong financial position to handle the pressure of the GDPR in Europe and other security concerns around the world. In addition, other similar companies also have to battle, therefore, the competitive position of Facebook, particularly with advertisers, is still very strong.
Three reasons not to panic
1) The growth is still impressive. Even with the worst scenario, Facebook's revenues would grow close to 24% in the fourth quarter of 2018. That is a number that most companies, especially those of the size of the social network, fail to achieve. The lower growth is "natural" in a company whose growth for years has been spectacular. However, Facebook's earnings per share are expected to almost double from $ 5.39 last year to 10.05 in 2020, representing an annual compound growth of 23 percent. In other words, the company still has a lot of growth ahead. The above is considered part of the traditional surprises that each year the social network comments on in a history of permanent innovation.
2) It is quite "irrational" that an action the size of Facebook loses almost 20% in a single session. The collapse may be due more to a "profit taking" than to a disappointing report. After the Cambridge Analytica scandal, the shares of the social network increased dramatically in recent months, earning more than 40% during that time. It is important that Facebook investors take a step back and take a long-term perspective. Financial media like to take advantage of such a strong one-day decline because it's a good story, but Facebook is still up 81% in the last three years and 413% in the last five years.
3) Cambridge Analytica and Russian piracy have provided arguments to warn of the dangers of global negative effects of companies such as the social network. The reality is that the company headed by Mark Zuckerberg plays a significant role in the lives of billions of people who choose to go to their platforms to connect with friends, family and others. Mark Zuckerberg said: "We have launched multiple changes in the last half of News Feed that encouraged greater interaction and engagement among people and we plan to continue launching more like this." He also underlined the importance of Facebook groups for people like new parents, people suffering from rare diseases, military families and others, while explaining another initiative that the company was launching to facilitate group entry. Management understands that the product is more solid when it is being built and fostering the community, because that is what makes the company valuable to users. The social network addressed the issue of security, listing the steps the company had taken to make advertising and advertisers more transparent and the investments made in security and privacy. At the end of this column the station had already been recovering from the July 26 low.
He is founder of the company SNX, Builders of Patrimony and entrepreneur on the Stock Exchange for many years. You can write your comments and questions to the email firstname.lastname@example.org.
Deputy General Director Grupo Financiero BX +
In Ixe Grupo Financiero and Grupo Financiero BX + he served as Deputy General Manager. He is the creator of the investment methodology known as "C4 Integral Strategy" for the Mexican stock market. Bachelor in Public Accounting graduated from the UNAM. He has been a professor at the Universidad Iberoamericana and ITESM.