Facebook 2Q - Missed on growth expectations

Facebook shares plunged as much as 24 percent in after-hours trading because it missed estimates for both revenue and daily users, and said it'll get worse.

Before the market closed at 16h00 Eastern Time, Facebook traded at $217.50 which was an all-time high, giving the company a market value of $630 billion. The earnings release came a few minutes after the closing bell.

After-hours trade is based on the reported prices of blocks of stock swapped between institutions and market-makers, so there is often a bit of wild action going on, and hedge-fund traders hitting the exit button. The last traded price was $173.50. If that price holds during normal hours today, this will be the biggest one-day stock wipeout (by value) in market history.



The second quarter financial results were a bit disappointing, to be honest. The stock fell more than 8% on that news, but they took another dive once the earnings call started and Facebook's chief financial officer David Wehner started discussing the company's financial outlook. He warned that revenue growth would slow from the 42% pace it posted in the second quarter and that operating margins would narrow from the mid 40s (% level) to the high 30s (% level) because expenses are growing. Currency issues, the move to more 'stories' and the increased focus on privacy and security could also lead to lower advertising revenue.

Why do I sound so sanguine? Keep in mind that Facebook management is known for being conservative when issuing forward guidance. It's part of their hipster way of managing expectations. Before you get too frantic about a 20% share price fall, keep in mind that this puts the stock price back where it was just three months ago. Finally, let's wait and see how the stock trades this afternoon when the cash market opens, and ordinary shareholders decide what to do with their shares. That will be at 9h30 Eastern (15h30 South African Standard Time). I've often seen stocks form a base and start to rally in these cases. "Buy the dips" is a common momentum trading strategy.

Even if the stock does not bounce, we will keep on buying the shares for new and established customers, and for ourselves. Facebook CEO Mark Zuckerberg pointed out yesterday that 2.5 billion people - a quarter of the world's population - now use at least one of Facebook's products each month. Remember, that's the main Facebook platform, as well as Instagram and WhatsApp.

Facebook is still a great investment. User engagement is still very strong and advertisers are very keen to work with them. Accumulate quality. Buy and hold. That's our mantra here at Vestact.