Is Facebook’s Stock Plunge Justified?

Facebook (NASDAQ:FB) announced its second quarter results on Wednesday, July 25, reporting a massive 42% year-over-year increase in revenues to $13.2 billion. In addition, its operating income jumped 33% to $5.8 billion, and net income was up 31% y-o-y to $5.1 billion. EPS was up 32% on a y-o-y basis to $1.74, in line with our expectations, which we have summarized on our interactive forecast dashboard for Facebook. Average monthly active users (MAUs) stood at 2.23 billion for the quarter, about in line with our expectations, while average revenue per user (ARPU) grew slightly slower than our expectations.

However, despite the largely expected results, Facebook’s stock price plummeted nearly 20% after the announcement, wiping out nearly $100 billion in market cap after modest guidance for the coming quarters. It should be noted that the “modest” revenue guidance for the next two quarters still represents a 25-30% year-on-year revenue increase, but it is substantially lower than the 40-45% revenue growth through the first half of the year. The other key factor that drove the stock price lower is the guidance for operating expenses, which are expected to increase by 50-60% in the latter half of the year, which the company attributed to increasing investment in core product development and infrastructure areas such as safety and security, augmented reality and virtual reality, sales & marketing and content acquisition. This should drive operating margins lower by 4-5 percentage points. In addition, capital expenditures are expected to be around $15 billion for the year, up from $6.7 billion in 2017 driven by additional investment in data center, servers and network infrastructure.

We forecast Facebook’s total MAUs through the year to be around 13% higher on a y-o-y basis at just under $2.3 billion. Much of the MAU growth is expected from the Asia-Pacific and Latin America regions. Similarly, ARPU is also expected to be up in double digits through the year. ARPU growth has been consistent across geographies even though the revenue generated per user varies from $7-8 per user in Asia Pacific, Latin America and Africa to $25 in Europe and over $80 per user in U.S. & Canada. Since the increase in operating expenses will likely outpace revenue growth, margins are expected to compress through the year. We have incorporated these two factors into our model for the company.

Despite lower than anticipated margins for the latter half of the year, Facebook’s full year results are largely in line with our prior expectations. We have a revised $188 price estimate for Facebook’s stock, slightly lower than our previous $194 price estimate. Our price estimate is slightly ahead of the current market price after the recent declines. If you disagree with our forecasts, you can change the key drivers – such as active users and average revenue per user (ARPU) – for Facebook to gauge how changes will impact its expected results.

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