Why did Facebook’s stock decline 4% on July 8, 2014?

Puneet Sikka

Why did tech stocks like Twitter sell off steeply? (Part 3 of 6)

(Continued from Part 2)

Facebook has managed to grow its revenue consistently

In the previous part of this series, we discussed why Twitter’s (TWTR) stock declined 7% yesterday, on July 8. We also saw that several other high-profile Internet stocks took a beating. One of these high-profile stocks was Facebook (FB). It fell 4%. Facebook’s stock performed better than Twitter’s this year. Its stock’s still up 20% year-to-date. Still, we didn’t expect a 4% fall in Facebook’s stock—especially since the company has been doing well in the online advertising market.

As the graph below shows, Facebook has been able to consistently grow its advertising revenues over the last few quarters despite a larger base. In fact, 82% revenue growth in Q1 2014 is only behind Twitter’s revenue growth of 125%. This growth is way ahead of Yahoo (YHOO) at 2%, Google (GOOGL) at 17%, and LinkedIn (LNKD) at 46%. But there are some concerns that could have been why the stock fell. Let’s try to analyze those concerns.

Facebook expects its Q2 revenue growth to slow

Facebook introduced News Feed ads in Q1 last year. These have become a major driver behind the company’s strong overall advertising revenue growth. Because of the addition of News Feed in Q1 2013, Facebook’s year-over-year revenue growth has been strong. You can see this trend in the chart above.

But the company believes its year-over-year comparisons will become more challenging moving forward. This is why it expects its revenue growth to slow in Q2.

Facebook’s recent investments aren’t expected to give you returns any time soon

Facebook has made several acquisitions. These include the mobile instant messaging app WhatsApp for $19 billion, the virtual reality company Oculus VR for $2 billion, and the photo sharing app Instagram for $1 billion.

But none of these acquisitions are expected to contribute to Facebook’s revenue growth any time soon. Facebook hasn’t announced any concrete plans to monetize WhatsApp. And the virtual reality market isn’t expected to pick up for another five years.

As far as Instagram, during the conference call to announce Q1 earnings, Facebook management admitted it’s focusing on ramping up Instagram’s user base rather than monetizing the platform. Similarly, management said that it won’t see any material contribution from video ads this year.

So there’s less visibility for Facebook’s future revenue streams. Investors may have factored in the slower revenue growth and reduced visibility going forward by pushing Facebook stock down.

Continue to Part 4

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