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Facebook Shares Slump After Results Show Slowing Growth

Sarah Frier

(Bloomberg) -- Facebook Inc.’s growth is slowing, adding pressure to a company facing more-restrictive privacy regulations and continued scrutiny from global lawmakers and antitrust officials.

The world’s biggest social-media company reported record fourth-quarter revenue of $21.1 billion, boosted by ads on Instagram and in video. The 25% increase from the period a year earlier was the slowest-ever quarterly sales growth for Facebook, though it topped analysts’ average estimate of $20.9 billion. Shares fell about 7% in extended trading on the news.

Facebook said it had 2.89 billion monthly active users of its products around the world, but growth stagnated in the U.S. and Canada on the main social network -- the primary source of advertising sales. Monthly active users hit 2.5 billion on the main network as of Dec. 31, slightly topping analysts’ estimate of 2.49 billion.

While Facebook and Alphabet Inc.’s Google dominate digital advertising sales, Facebook has warned for several quarters that growing at the same rate will be more difficult in the future. The company’s trajectory is limited by the number of world internet users, most of whom already have an account on Facebook or its WhatsApp, Instagram and Messenger properties. That means finding new revenue streams will be increasingly challenging, requiring experimentation that might not pay off, such as in artificial intelligence, virtual reality and shopping.

What Facebook “has to grapple with is a rising cost framework while each incremental dollar of revenue growth gets tougher,” said James Cakmak, a partner at Clockwise Capital.

Expenses rose 34% to $12.2 billion the period ended Dec. 31, the Menlo Park, California-based company said Wednesday in a statement.

The uncertainty about the pace of growth comes as Facebook finds itself with fewer public cheerleaders. The company has been vilified by U.S. presidential candidates while facing new global privacy laws and two federal antitrust probes. Chief Executive Officer Mark Zuckerberg has testified multiple times in Congress about his company’s stumbles.

Zuckerberg said the company will take a tougher tone with its critics than in the past when Facebook tried to make people happy. “My goal for this next decade isn’t to be liked, but to be understood, because in order to be trusted people need to know what you stand for,” he said on a conference call with analysts.

The CEO said he will continue to push for encrypted messaging, even though critics say it gives criminals a way to hide from law enforcement. He will advocate for people to associate with whomever they want, even though some Facebook groups have been havens for radicalization and conspiracy theories. And he will support hyper-targeted advertising and advertising in general, he said, so small businesses can have access to the same tools as big brands -- and so Facebook remains free of charge to users.

“These positions aren’t always going to be popular, but I think it’s important for us to take these debates head-on,” he said.

Facebook was less willing to talk about what investors really want to know: the details of the company’s ventures into new business lines. Executives didn’t say how Facebook will make money from WhatsApp, or the rollout of shopping on Instagram, for example.

Chief Financial Officer Dave Wehner said the quarterly results also don’t reflect the effects of privacy rules like Europe’s General Data Protection Regulation and the California Consumer Privacy Act. Advertisements will get more difficult to target, Wehner said on a conference call. “The majority of the impact lies in front of us.”

Separately, the company disclosed it had agreed to pay $550 million to settle claims its photo-scanning technology violated an Illinois state law. It’s one of the largest consumer privacy settlements in U.S. history, according to lawyers for consumers.

Facebook’s said it had 248 million monthly active users in the U.S. and Canada on its main social network at year’s end, an increase of 2.5% from the period a year earlier and just 1 million more people than at the end of the previous quarter.

The company’s stock gained 55% in the past year, closing Wednesday at a record high of $223.23 in New York.

“Facebook stock has had a huge run and investors were hoping for even faster growth, especially in the U.S,” said Richard Greenfield, an analyst at LightShed. The “bar was high,” he added, citing the stock price heading into the earnings report. “This is not ‘broken.”

The company reported net income of $7.35 billion, or $2.56 a share, compared with $6.88 billion, or $2.38 a share, a year earlier. Analysts, on average, estimated $2.53 a share.

What Bloomberg Intelligence Says

Facebook’s results reflect its a transition to an emphasis on privacy. This may limit some upside in terms of ad pricing, targeting and inventory, despite strong end-market demand. As Facebook scales up its efforts in private social networks and diversifying revenue, this could temporarily weigh on sales before re-accelerating.

-- Jitendra Waral, BI internet analyst

Click here for the research

(Updates with comments from CEO beginning in the eighth paragraph.)

--With assistance from Kurt Wagner and Nancy Moran.

To contact the reporter on this story: Sarah Frier in San Francisco at sfrier1@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack

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