Facebook's woes 'deeper than a 1-day sell-off,' NYU professor says

JP Mangalindan
Chief Tech Correspondent

Facebook’s (FB) historic stock sell-off after its earnings miss on Wednesday isn’t just a blip, according to Scott Galloway, a professor of marketing at NYU Stern School of Business and author of the book, “The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google.”

It’s an indicator of frustrations with management boiling over, given months of scandals and bumbled course corrections from the social network, he says.

Since Facebook reported second-quarter earnings on Wednesday afternoon that missed expectations, the social network’s stock has tumbled over 19%, slashing over $100 billion from its market cap.

FILE PHOTO: Facebook’s founder and CEO Mark Zuckerberg reacts as he speaks at the Viva Tech start-up and technology summit in Paris, France, May 24, 2018. REUTERS/Charles Platiau/File Photo

‘This is pent-up anger’

“This is pent-up anger, and the markets exploded at Facebook,” Galloway argues. “It’s deeper than a one-day sell-off. It’s like when your husband screams at you for leaving the garage door open. It’s not about the garage door. It’s about something else.”

That “something else” refers to Facebook executive management’s handling of events since mid-March, when The New York Times  reported that the voter-profiling company Cambridge Analytica had effectively harvested the data of up to 87 million Facebook users. The scandal sparked a larger, ongoing conversation around users’ data privacy and calls for government regulation.

But for Facebook, it ignited a series of course corrections and apologies that haven’t gone over well with many pundits, analysts and investors. And while Facebook CEO Mark Zuckerberg has conducted his fair share of interviews — including a controversial sit-down last week touching on Holocaust deniers — Galloway noted COO Sheryl Sandberg has been relatively absent from the media circuit.

‘Facebook just materially reset expectations’

To add insult to injury, Facebook management on Wednesday’s earnings call warned of slower revenue growth for the third- and fourth-quarters in the high-single digits because of factors that include more data privacy options for users — in direct response to the Cambridge Analytica scandal — and the promotion of newer initiatives like Stories and Watch. 

“Facebook just materially reset expectations while blaming currency, GDPR, privacy, stories, and the kitchen sink,” wrote Stifel analyst Scott Devitt in a note published on Wednesday. He described Facebook’s failure to mention these challenges during its first-quarter earnings as “infuriating.”

“Mark Zuckerberg has been talking and writing about fixing the business for months now and yet management is just now discussing its impact to financial results. … The company had every opportunity to begin to discuss these topics on the 1Q conference call but took a pass on it,” he said.

As a result, Devitt added Stifel is sticking with the stock on sell-off, slashing its price target for Facebook stock from $242 to $202, because the “damage is likely done” but there remains a good business despite management.

Brian Wieser, an analyst for Pivotal Research Group, took a more measured stance.

“Although not far from consensus nor our own estimates for 3Q18, this level of decline was well below 4Q18 expectations and suggests most investors would need to bring down expectations for subsequent periods too,” Wieser wrote in a report published on Thursday. “Such a development should not be surprising given our view that digital advertising and advertising more generally has real limits to growth, although we recognize that most of the investment community has ignored this consideration, which we considered an inevitability, if one that might have been a little further off.”

Clearly, the investment community isn’t ignoring that reality now.

JP Mangalindan is the Chief Tech Correspondent for Yahoo Finance covering the intersection of tech and business. Email story tips and musings to jpm@oath.com. Follow him on Twitter or Facebook.

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