Facebook controversies hit it where it hurts most - growth

San Francisco

FACEBOOK Inc's scandals are finally hitting it where it hurts: growth.

The social-media goliath's financial performance had previously seemed immune to fierce criticism of its content policies, its failure to safeguard private data and its changing rules for advertisers.

But on Wednesday, Facebook reported sales and user-growth numbers that fell short of analysts' projections - in a set of second-quarter results that left investors reeling.

The company's shares plunged as much as 24 per cent in after-hours trading, driving the market value down by US$151 billion at one point.

As markets opened on Thursday in the US, Facebook went into freefall. As at 11pm Thursday (Singapore time), it was about 19 per cent down at about US$176, dragging down with it the rest of its "FAANG" peers. FAANG refers to Facebook, Apple, Amazon, Netflix and Google (Alphabet).

For those hoping for a swift bounce back, the company told Wall Street the numbers won't get any better this year. Chief Financial Officer David Wehner said revenue growth rates would decline in the third and fourth quarters.

Analysts who follow Facebook were blindsided, asking frequently on a conference call with executives for more information on exactly how the company's financial future had changed so dramatically.

Brent Thill, an analyst at Jefferies LLC, said: "I think many investors are having a hard time reconciling that deceleration. It just seems like the magnitude is beyond anything we've seen, especially across a number of the tech (companies) we cover."

For Facebook, financial stumbles are rare. The last time it missed revenue estimates was the first quarter of 2015. But the results followed a period in which data-privacy issues came under harsh scrutiny, with chief executive officer Mark Zuckerberg testifying before US Congress for hours on the company's missteps.

The quarter was also marked by Europe's implementation of new data laws, which Facebook said led to fewer daily visitors in that region.

The company has also been bombarded by public criticism over its content policies, especially in Myanmar and Sri Lanka, where misinformation has led to violence.

Facebook has continued to suffer fallout from investigations into Russian manipulation of the platform during the 2016 US presidential election.

All these problems are hitting amid a harsh truth for the company: Facebook, the social network with 2.23 billion active monthly users, can't grow forever. "The core Facebook platform is declining," said Brian Wieser, an analyst at Pivotal Research Group.

Facebook said it had 1.47 billion daily active users in June, compared with the 1.48 billion average of analysts' estimates compiled by Bloomberg. The company's user base flatlined in its biggest market, the US and Canada, at 185 million daily users, while declining 1 per cent in Europe to 279 million daily users. Overall, average daily users rose 11 per cent from the year-ago period.

Revenue rose 42 per cent to US$13.2 billion in the quarter; analysts had projected US$13.3 billion.

The social network still holds one of the world's most valuable sets of data on what people are interested in, and makes that audience easily available to advertisers. The company remains in a dominant position in mobile advertising alongside Alphabet Inc's Google.

Mr Wieser said in a note after the earnings: "As we have written about extensively, the advertising industry - and digital advertising no less - has limits to growth, which we think is the primary factor constraining Facebook's revenue opportunity.

"Deceleration such as management guided toward suggests that while the company is still growing at a fast clip, the days of 30 per cent-plus growth are numbered."

CFO Wehner gave three reasons for a decline in the company's revenue growth: currency headwinds, greater investments in new kinds of content-sharing such as disappearing videos, and greater user control over privacy - a direct response to criticism the company has fielded.

After the General Data Protection Regulation took effect in Europe, Facebook started asking people to check their privacy settings and to make sure they wanted to share certain kinds of data. Facebook is rolling out a version of those protections to the rest of the world. If users choose to share less data with Facebook, that could hamper the company's ad-targeting abilities, making it less attractive to marketers.

While privacy was an issue in Europe, politics played a role in North America, the company's most lucrative advertising market. Facebook disrupted some business by putting in place new rules to get all political advertisers to verify their identities.

The company may have halted more ad purchases than expected, as it applied a broad definition of what's considered "political".

After the earnings report, executives worked to explain the potential of Facebook's other properties - not just the main social network - to fuel growth. The company owns three other properties with more than a billion users: WhatsApp, Messenger and Instagram. Together, the entire Facebook suite of products has 2.5 billion unique monthly users, the company disclosed for the first time. BLOOMBERG