Facebook Braces for Stock Wipeout as Lower Margins Loom

July 26, 2018

By Vibhuti Sharma and Munsif Vengattil

(Reuters) - Facebook Inc Chief Executive Officer Mark Zuckerberg’s fortune is set to take a $16 billion hit on Thursday, as the social media giant braces for the biggest one-day wipeout in U.S. stock market history, a day after its executives forecast years of lower profit margins.

At least 16 brokerages cut their price targets on Facebook after executives said the cost of improving privacy safeguards, as well as slowing usage in the biggest advertising markets, would hit the company’s profit margins for more than two years.

Facebook shares were down 20.4 percent at $173.20 in premarket trading, a decline that would wipe about $128 billion off the company’s value - or nearly four times the entire market capitalization of Twitter Inc.

Facebook’s second-quarter results were the first sign that a new European privacy law and a string of privacy scandals involving Cambridge Analytica and other app developers are hitting the company’s business.

Facebook also warned that the toll would not be offset by revenue growth from emerging markets and the company’s Instagram app, which has been less affected by privacy concerns.

Describing the announcements as "bombshells", Baird analysts said the issues were to a large degree "self-inflicted" as Facebook sacrifices its core app monetization to drive usage.

Of 47 analysts covering Facebook, 43 rate the stock as "buy", two rate it "hold" and two rate it "sell". Their median target price is $219.30.

The $16.4 billion in net worth that Zuckerberg stands to lose would alone be enough to get a rank of the 80th-richest person in the world, a position currently held by real-estate developer Donald Bren with a net worth of $16.3 billion, according to Forbes.

Some analysts said Facebook’s issues would not be easily resolved.

"Unlike Netflix, whose quarterly shortfall we saw as temporary, here we see an evolution of the story, albeit a portion of which we expected," said Daniel Salmon, analyst at BMO Capital Markets.

Others, however, saw a silver lining in Facebook’s emphasis on more engaging content and its promotion of stories on its News Feed, which would support revenue over the longer term.

"Bears win this quarter ... but not the war," said Brent Thill, an analyst with Jefferies.

(Click here for a graphic on Facebook's slowing revenue growth)

Reporting by Vibhuti Sharma, Munsif Vengattil and Devbrat Saha in Bengaluru; Editing by Robin Paxton