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Why did Facebook’s overdue stock market slap in the face happen?

Peter Switzer
Friday, July 27, 2018

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Facebook has copped its comeuppance slap at the hands of its second best lover — investors. The first best fans are the users and then there are the poor businesses that have to use it to get through to their customers and pay through the neck to hopefully make it happen.

But it has been the work of investors that has delivered this excessively successful company the ultimate punishment, with its share price down 20% in one day!

At $US175, where it is today, this share price plunge has KO’d a year’s worth of gains so let’s find out why it’s lost its ‘darling’ of the stock market tag.

All this comes just as we’ve learnt that six companies have been responsible for 98% of the gain in the US stock market index called the S&P 500. This calculates the collective movements of share prices daily on America’s top 500 listed companies and the importance of Facebook, Amazon, Apple, Netflix, Microsoft and Google or Alphabet (as it called on the stock market) can’t be underestimated.

In fact, I’m surprised that the index is only down 0.23%. It says the apparent dodging of a trade war between the USA and the EU has helped Wall Street keep it pretty positive, with other important companies kicking in to help the index avoid a huge drop.

That’s good news for our market today, but let’s get to this face slap for Facebook, which looks like being the company’s worst share price day in its history. What’s said on Facebook about Facebook will make interesting reading, especially if you’re a shareholder of Facebook.

By the way, last week, Charlie Aitken in our Switzer Report warned that a lot of tech stocks here and overseas looked overpriced but his assessment came out on the day the local Afterpay’s share price spiked about 40%! It has peeled back 9% or so since then but its story is more an exception, as it had a special good news story of a success in its move into the USA.

Certainly, Facebook’s slide and the story behind it says Charlie was probably on the money saying tech stocks were vulnerable to a price fall.

So let’s find out what happened with Mark Zuckerberg’s beloved Facebook.

Behind this $120 billion plunge in value was a miss with its guesses on key metrics that tell what future probably lies ahead for the company. These metrics are things like total revenue and profit estimates but with tech stocks they can even be more technical. Average revenue per user is a special one for Facebook and, along with advertising revenue projections, both aren’t looking great for the year ahead.

This follows a bad public relations time for the company, with the Cambridge Analytica data privacy breach scandal. And then there has been ‘fake news’ allegations and realities that haven’t helped the company’s collection of users. And these issues have also led to higher costs in trying to right the wrongs.

How important is this story? This is how The New York Times saw it: “It was one of the largest single-day losses, in terms of market value, on record for a single stock,” it tells us. “The dollar value decline in Facebook’s market value Thursday is roughly equivalent to the entire value of some of the country’s most-well known companies, including General Electric, Texas Instruments and Union Pacific railroad.”

To be fair, this is an overdue pullback in share price and, given the company’s bad news over the past year, the stock market should have marked this company down because it had to lose some fans, especially with the fake news and data privacy disasters.

I don’t think this is curtains for Facebook but it’s probably a slap in the face that it deserved for behaviour unbecoming. I’m sure it will survive, but it will have to live with a lower share price for the moment.

Interestingly, this comes at a time when my business is wondering about the value of Facebook and whether the money spent could be put to better use. And I’m sure a lot of other business owners and managers are asking exactly the same question.

Published: Friday, July 27, 2018


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