Why Facebook, Inc. Stock Dropped 11.2% in July

The social media giant's latest quarterly report left investors worried for its future growth.

Steve Symington
Steve Symington
Aug 9, 2018 at 10:20AM
Technology and Telecom

What happened

Shares of Facebook (NASDAQ:FB) fell 11.2% in July, according to data from S&P Global Market Intelligence, after the social-media titan's second-quarter results left investors concerned over decelerating growth and rising costs.

To be sure, Facebook stock was actually up modestly with only a few days left in the month, then plunged nearly 19% on July 26, 2018 alone -- the first trading session after its Q2 report hit the wires.

Facebook 1 Hacker Way address sign with a Like thumbs up logo.

Image source: Facebook.

So what

That's not to say Facebook's results looked bad at first glance. Revenue climbed 42% year over year to $13.2 billion, while earnings per share grew 32% to $1.74. Facebook's daily and monthly active users also each grew 11% year over year to 1.47 billion and 2.23 billion, respectively.

By contrast, however, most analysts were anticipating higher revenue of $13.4 billion, albeit with slightly lower earnings.

But keeping in mind that top-line gain slowed significantly from 49% growth in the first quarter, what truly spooked the market were comments from Facebook management during the subsequent conference call. In particular, CFO David Wehner warned that revenue growth will continue decelerating in the second half of the year, while operating expenses -- which increased 50% during the quarter -- will continue to climb at rates exceeding revenue growth both this year and next. 

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Now what

Of course, as it builds on its larger base, it seems to go without saying that Facebook couldn't simply sustain its torrid pace of growth indefinitely. And a large reason underlying its soaring operating expenses are investments the company is making to improve safety, security, and privacy on its steadily growing namesake platform. Those investments should pay dividends for patient shareholders down the road as Facebook secures trust and rapport with its users.

We should also note that Facebook stock was up more than 40% in the year leading up to its report, leaving many traders tempted to take some of those profits off the table at the first inkling of worrisome news. As such, and as someone who believes in Facebook's long-term story, I think investors would do well to take advantage of this pullback to open or add to their positions.