Facebook Inc. has contended with data privacy scandals, U.S. lawmaker scrutiny and slowing user growth in 2018. Yet the social network’s shrinking margins are giving investors the most pause.
As the internet giant’s shares continue to languish in the aftermath of its $121 billion one-day rout in July, Facebook will need to show that it can jump-start earnings growth to restore faith with investors who have been reluctant to buy, analysts and shareholders say.
“Facebook hasn’t built confidence in anybody,” Ross Gerber, chief executive officer of Gerber Kawasaki Wealth & Investment Management, said by phone. “They’ve done a very poor job at dealing with problems.”
Shares of the Menlo Park, California-based company have continued to slide after the historic selloff, which was triggered by forecasts for narrower operating margins and slowing revenue growth. Criticism of its content policies from U.S. President Donald Trump and the prospect of government regulation haven’t helped, nor have indications that some users are reducing time spent on Facebook. On Wednesday, U.S. lawmakers on the Senate Intelligence Committee discussed the regulation of social-media companies during testimony from Facebook Chief Operating Officer Sheryl Sandberg. The stock fell 3.9 percent as of 1:04 p.m. in New York on Thursday, extending its losing streak to a fourth-consecutive day.
While shares of Faang-group counterparts Apple Inc. and Amazon.com Inc. have been setting records, Facebook is the only member that has lost ground in 2018. Netflix Inc. is up 78 percent, while Google parent Alphabet Inc. has gained 14 percent.
For Wedbush Securities analyst Michael Pachter, the pressure on Facebook’s share price might be eased if the company cut spending.
Facebook’s expenditures on initiatives like product development, infrastructure and security -- including plans to hire thousands of people to work on investigating issues with fake news and election interference -- will increase 50 percent to 60 percent this year and will outpace revenue growth in 2019, Chief Financial Officer David Wehner said on the July 25 earnings call. Capital expenditures, which includes spending on physical assets like data centers and equipment, are forecast to jump to $15 billion in 2018, up from $6.7 billion last year. Wehner said operating margins will "trend towards" the mid-30 percent range over the next several years. That compares with 44 percent in the second quarter.
"Facebook is essentially saying, whatever you think our revenues are going to do, our operating expenses are going to grow faster," said Pachter, who has had an outperform rating on the stock since the initial public offering in 2012. "If margins do in fact compress, they should rethink what they’re spending money on because investors don’t like it. If in fact margins expand, the stock is going to zoom right back up to $200 and keep going."
The spending is necessary, in part, because the company’s main moneymaker -- the ads in the Facebook news feed -- can’t grow much further. The company’s news feed has been able to steadily fuel growth, either with more users or more ads. Now, the company connects a majority of the world’s internet population, so the future drivers of growth will have to come from more experimental revenue sources, like messaging and virtual reality.
Declining margins were at the core of a rare downgrade on Tuesday by MoffettNathanson analyst Michael Nathanson, who had maintained a bullish rating on the stock since 2015.