Facebook (Nasdaq:FB) stock is under heavy selling pressure lately. Shares of the leading social network are down by nearly 20% from their highs of the year after the company provided guidance for decelerating revenue growth and shrinking profit margins in the most recent earnings report.
Interestingly, the current entry price looks fairly attractive, even when incorporating expectations for slower growth in the coming quarters. Besides, the company’s long-term growth prospects are still pretty exciting.
The Fundamentals Are Still Solid
Facebook management said in the most recent earnings report that it’s expecting revenue growth to decelerate “by high-single digit percentages” from prior quarters sequentially in both the third quarter and the fourth quarters of 2018.
Revenue growth is clearly decelerating, but the growth rates have been considerably above 40% year over year in recent quarters. Chances are that the company will continue growing at well above 20% in the coming quarters, which is still quite a vigorous growth rate for such a massively big corporation.
FB Revenue (Quarterly YoY Growth) data by YCharts
Operating margin is also expected to retrace from nearly 45% currently to around 35% in the next couple of years. A compression in profit margins is hardly good news for investors, but the fact is that Facebook will remain a remarkably profitable business by all standards.
This reduced guidance from management is due to a combination of factors:
In a nutshell, Facebook is making some important changes that are improving the user experience and strengthening the company’s value proposition for users and advertisers. These changes make sense from a long-term perspective, but they are taking a toll on financial performance in the short term.
In Mark Zuckerberg’s words:
Now, in light of increased investment in security, we could choose to decrease our investment in new product areas, but we’re not going to, because that wouldn’t be the right way to serve our community and because we run this company for the long term not for the next quarter
It’s important to put the numbers in perspective. Even under the new guidance from management, Facebook is expected to deliver revenue growth well above 20% year over year and operating profit margins around 35%. The new guidance represents a downward adjustment in expectations, but the business will clearly remain fundamentally solid, and most companies in the world can only envy such kind of financial performance.
