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The Silver Lining From Facebook's Disappointing Quarter

Joe Tenebruso, The Motley Fool

Facebook's (NASDAQ: FB) stock got hit hard after its second-quarter earnings call, as investors focused on the social-media giant's forecast of lower revenue growth and operating margins in the quarters ahead.

But Facebook's management team shared some other important information during the call that many investors appear to be overlooking. Here are some key quotes you won't want to miss.

Facebook CEO Mark Zuckerberg

Facebook CEO Mark Zuckerberg. Image source: Facebook.

Investments will create value

I want to start by talking about all the investments we've made over the last six months to improve safety, security, and privacy across our services. This has been a lot of hard work and it's starting to pay off. We recently launched two important ad transparency tools: one to let anyone see the ads, any pages running, even if the ads aren't targeted to you.

And the other: an archive of ads with political or issue content that's starting in the U.S. ready for the midterm election. These ads are now labeled so you can clearly see who's paying for them. And within the archive, you can see the budget associated with each ad, how many people saw it, and search all ads with political or issue content that an advertiser has run for up to seven years. This level of transparency will mean increased accountability and responsibility for advertisers globally.

-- CEO Mark Zuckerberg

Much has been made about Facebook's operating costs rising, but less has been said about the positives these investments will bring about. Facebook is on a mission to fight misinformation. It's reducing incentives for people to spread fake news and strengthening its artificial intelligence capabilities to better identify false information. Together, these investments should help Facebook improve the safety and integrity of its services, thereby making them more valuable to its users.

Privacy concerns may be overdone

I also want to talk about privacy. GDPR [see below] was an important moment for our industry. We did see a decline in monthly actives in Europe, down by about 1 million people as a result, and at the same time it was encouraging to see the vast majority of people affirm that they want us to use context, including from websites they visit, to make their ads more relevant and improve their overall product experience.

-- Zuckerberg

The enactment of the General Data Protection Regulation (GDPR) in the European Union did lead to a slight decline in active users, as expected. However, with the "vast majority" of users electing to allow Facebook to use their personal information in order to provide more-targeted ads, claims that privacy concerns would crater the social-media titan's business now appear far-fetched. Nevertheless, Facebook is spending heavily to improve its privacy features in order to win back whatever user trust it lost as a result of the Cambridge Analytica debacle -- and to maintain that trust, once rewon.

A focus on Groups

Now there are more than 200 million people who are members of meaningful groups on Facebook, and these are communities that upon joining become the most important part of your Facebook experience and a big part of your real-world social infrastructure. These are groups for new parents, for people with rare diseases, for volunteering, for military families deployed to a new base, and more. We believe there is a community for everyone on Facebook.

-- Zuckerberg

Facebook wants to use Groups as a means to boost engagement on its platform. The company is making it easier to create and grow a group, in order to make it less time-consuming for administrators. Facebook also plans to better promote the most engaging groups, as part of its goal of "helping 1 billion people be a part of meaningful communities" in the next five years. And the more Facebook can increase engagement, the more valuable its platform will be to users and advertisers alike.

Facebook Chief Operating Officer Sheryl Sandberg

Facebook chief operating officer Sheryl Sandberg. Image source: Facebook.

Helping smaller businesses

Advertisers of all sizes want to know if their ads are working, and how to make them better, but smaller businesses don't always have this capability. We're changing that. Last year, we introduced Test and Learn, a way for advertisers to run variations of their ads and measure the results in just a few steps. We started with tools for direct-response advertisers to figure out what drives conversions. In Q2, we added a way for companies to understand the effect of their ads on brand perception. We plan to roll this out to all advertisers big and small, so they can easily experiment with different strategies and find the ones that work best.

-- COO Sheryl Sandberg

Large enterprises will likely always comprise a major portion of Facebook's ad revenue, but small businesses represent a sizable growth opportunity. Facebook is launching new tools to help even the playing field, by making it easier for smaller advertisers to maximize their return on investment. The more successful Facebook is in this area, the larger its total addressable market opportunity will ultimately be.

Instagram's staggering growth

This quarter, we also reached a milestone with now more than a billion actives on Instagram, and this is a moment to reflect on how this acquisition has been an amazing success. When Instagram joined us, the team had only 16 people. And since then, Kevin and the team have built Stories, Direct, and now IGTV. This has been a story of great innovation and product execution. And it's also a story of how effective the integration has been. We believe Instagram has been able to use Facebook's infrastructure to grow more than twice as quickly as it would have on its own.

-- Zuckerberg

Many skeptics derided Facebook's decision to acquire Instagram for $1 billion in 2012. Back then, Instagram had 30 million users. But since that time, Instagram has grown at a torrid rate, and now boats more than a billion active users. In fact, Instagram has become so valuable that analysts believe it could be worth more than $100 billion today. All told, Facebook's purchase of Instagram may go down in history as one of the best corporate acquisitions of all time.

Facebook's user base is strong and growing

Facebook now has more than 2.2 billion monthly active [users], with almost 1.5 billion actives using it every day.

For the first time today, we're also releasing how many people use at least one of our apps: Facebook, WhatsApp, Instagram, or Messenger. And that's 2.5 billion people each month.

-- Zuckerberg

While much has been said about Facebook's slowing growth, one thing that should not be overlooked is its awe-inspiring scale. With more than 1.5 billion people using Facebook every day and 2.5 billion using its apps every month, the company's reach is incredible. Moreover, its daily and monthly active users both grew 11% year over year, so this is not a declining business.

Investors may need to become accustomed to a slower earnings growth rate in future quarters, but Facebook's core business remains quite healthy.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.