July 25, 2018 / 9:39 PM / 25 days ago

Breakingviews - Investors hit brakes on record-high Facebook

DALLAS (Reuters Breakingviews) - Facebook is showing signs of stranger things. The social network’s stock closed at an all-time high on Wednesday, valuing it at some $630 billion. But then investors found enough to dislike in the company’s second-quarter earnings to bring an after-hours selloff. Yet a cauldron of fake-news scandals and possible regulation is lurking. The news feed could get a lot worse.

Selena Gomez performs during the Z100 Jingle Ball at Madison Square Garden in the Manhattan borough of New York December 11, 2015. REUTERS/Carlo Allegri

Mark Zuckerberg’s social network reported that revenue grew 42 percent in the quarter to June from a year earlier, to over $13 billion, almost all from advertisers. That fell short of analysts’ expectations of $13.4 billion, but only by a wisp. More people are using it, too. Facebook said that daily active users increased 11 percent to a hair shy of 1.5 billion – an astonishing number for the business that started in a Harvard dorm room in 2004. Yet that may be the weak point for stock-market observers. Compared to the first quarter of 2018, user numbers look flat to down in the developed markets of North America and Europe.

Nonetheless Instagram, the core Facebook product’s happy-go-lucky sidekick, is benefiting from influential young users. Pop star Selena Gomez hit her own record when she posted pictures of her 26th birthday party this week on Instagram, becoming the fastest user to reach 1 million likes and beating out cultural phenomenon Beyoncé. Gomez’s post boasted nearly 9 million heart symbols by 4 p.m. EDT on Wednesday – but then again, she does have nearly 140 million followers.

Moreover, even when the roughly 8 percent initial slide in the company’s stock in late New York trading accelerated to a drop of over 20 percent – a whopping $130 billion of lost value – after the company expressed further caution about future revenue growth rates, the stock is still up well over 10 percent since a late March low following the now infamous Cambridge Analytica data-sharing debacle.

And Zuckerberg’s efforts to find more users will only become more challenging. China, the world’s most populated country, withdrew its approval for Facebook to open a venture in the Middle Kingdom earlier this week. And the company’s lead counsel, who testified before Congress on matters related to Russians using the network to manipulate the 2016 U.S. presidential election, is leaving – a rare senior departure.

The founder’s recent tone-deaf remarks regarding free speech, Holocaust denial and what should remain on Facebook’s news feed ought to be at least an amber warning, too. Investors may come to wish they’d hit the brakes on the stock harder and sooner.

(This item has been updated in the headline and paragraph four to include information from Facebook’s earnings conference call and the stock-market reaction.)

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