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What Happened in the Stock Market Today

By Demitri Kalogeropoulos – Nov 3, 2016 at 9:35PM

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Why Facebook and Fitbit stocks slumped on Thursday.

Image source: Getty Images.

Stocks declined on Thursday, with the Dow Jones Industrial Average (^DJI 1.26%) falling further below 18,000 and the S&P 500 (^GSPC 1.44%) index giving up nearly 0.5% ahead of a key economic report due on Friday morning.

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Data source: Yahoo! Finance.

The SPDR Select Financial Sector Fund (XLF 1.10%) attracted heavy trading as investors continued to adjust their expectations for a December interest rate hike, which could rise even further if Friday's job market data -- due to publish before the market opens -- shows strong payroll gains for the month of October. Meanwhile, the iShares MSCI Emerging Index Fund (EEM -0.13%) fell slightly, following overnight declines in Asian markets.

Facebook (META 1.97%) and Fitbit (FIT) stocks both endured sharper declines than the broader market after warning investors to expect slower sales gains in the quarters ahead.

Facebook's advertising volume

Facebook's stock took a step back from all-time highs following its third-quarter earnings report. The social media giant posted strong operating results: Revenue rose 56% thanks to a near-60% jump in advertising sales. Facebook also kept up its enviable engagement gains as daily active users rose 17% to 1.18 billion. 

Profits grew at a much faster pace than revenue. The company produced $2.4 billion of net income -- up 166% over the prior year. Operating margin soared to 45% of sales from 32%. Facebook continued to monetize its huge base of fans, too. Worldwide average revenue per user crossed $4, or 35% better than last year.

Image source: Facebook investor presentation.

"We had another good quarter," CEO Mark Zuckerberg said in a press release.

Wall Street looked right past those impressive results to focus on worries about next year's gains given that advertising growth of better than 50% per year isn't likely to continue for much longer. A key factor behind those gains, after all, has been increased ad volume on feeds.

Facebook is approaching the point where it can't scale that up any longer, so executives "expect to see ad revenue growth rates come down meaningfully," according to management's comments to investors. Gains in the user base and in engagement levels (for example, through more video interactions) should offset much of that drop -- but not all of it. 

Fitbit's holiday forecast

Fitbit shares plunged by 33% after the wearable tech giant announced surprisingly weak third-quarter results while lowering its forecast for the critical holiday season. Operating figures for the quarter that just closed were solid. Sales rose 23% to $503 million, or right within management's target of between $490 million and $510 million.

Image source: Getty Images.

Gross profit margin was on point, too, weighing in at 48% of sales. "I am pleased to see positive reception for new products launched in the third quarter," CEO James Park said in a press release. 

But Park and his team aren't happy with the pace of that reception and implied that their latest product lineup, including new editions of Charge and Flex fitness tracking devices, are suffering from usability issues.

As a result, the company sees a much weaker holiday season ahead than it originally projected. Sales are forecast to hardly grow at all, with a target range of between 2% and 5%. The poor seasonal outlook will bring 2016 revenue to about $2.33 billion, and while that represents about 25% growth over the prior year, it is significantly below the $2.6 billion Fitbit projected in early August.

The good news for investors is that the company remains profitable, and with shares down 71% so far this year, there's more of a risk that Wall Street is being too pessimistic than too optimistic. Yet Fitbit's business depends on it launching popular fitness devices that dominate its industry each holiday season. The company appears set to fall short of that goal with this latest crop of product releases.

Demitrios Kalogeropoulos owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook and Fitbit. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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