On Thursday, the parent company of Facebook, Meta, witnessed its largest one-day drop ever, with its stock closing down by 26%. This came after the company’s forecast for weaker-than-expected revenue growth for the upcoming quarter. This news came as a shock to many investors and has caused ripples in the tech sector.
We will look further into the details of this incident in this article.
Facebook stock plummets 26% in its biggest one-day drop ever
Facebook’s stock price has generally trended higher over the past several years, with few major dips to worry investors. However, the company’s share price collapsed by more than 26% on Thursday — its biggest one-day drop ever — after it forecasted weaker revenue growth in the next quarter. The fall erased $119 billion in market capitalization, making this one of the largest single-day losses in U.S. stock market history.
Facebook has had to contend with several obstacles to its stock price recently, including ongoing investigations into its data privacy practices, questions about its business model, and slowing user growth — particularly in Western European markets such as Germany and France that have been slower to embrace digital advertising. Still, this rather sudden dive was unexpected for many investors who had been optimistic about Facebook’s long-term prospects due to its robust user base and diversified product offerings (Messenger, Instagram, WhatsApp).
Analysts now expect Facebook’s stock to remain volatile shortly amid global uncertainty regarding a potential trade war between China and the United States and worries about slowing business activity worldwide due to political unrest and BREXIT negotiations in Europe.
Biggest One-Day Drop Ever
On Thursday, July 26, 2018, Facebook’s parent company, Meta – the world’s fourth-largest company by market capitalization – experienced its biggest one-day drop in market value ever. Shares of the popular social media giant closed down more than 26%, representing a staggering loss of around $119 billion in its stock market value.
Store closures and reduced expectations of continued growth in revenue and profits over the next quarter triggered this plunge.
The decline came after Meta reported its second-quarter earnings on Wednesday evening, missing analyst expectations for earnings per share and revenue. In addition, the company also provided significantly lower guidance for year-on-year revenue growth than expected. In response to this news, many investors reacted to the release by selling off their Meta shares with analysts stating that investors had become concerned about Meta’s waning influence on younger users and fears of a regulatory crackdown on the social media giant.
Reasons for the Plunge
On Thursday, Facebook’s parent company, Meta, saw its shares plunge by more than 26% in its biggest one-day drop. This was because the company predicted weaker-than-expected revenue growth in the next quarter.
There are several reasons for this reduction in stock value, and this article will discuss some of the key factors that could have caused the plunge.
Weaker-Than-Expected Revenue Forecast
The Facebook parent, Meta, shocked the market after warning of weaker-than-expected revenue growth forecasting shortly. This news caused a massive selloff, leading to a sharp 26% plunge in the company’s stock, its biggest single-day drop ever. The shares ended Thursday at $203.23 per share, seemingly wiping off $120 billion worth of market value.
The company attributed this sharp decline to changes it makes on its news feed algorithm which are meant to prioritise meaningful social interactions and reduce low quality videos. Meta executive Andrew Bosworth explained that “by making these changes, we expect some disruption in our business in the short term….but we feel these are necessary for us to be successful over the long run”.
Facebook has made similar changes in the past. As such, investors were hopeful for an increase in revenues but were shocked when CEO Mark Zuckerberg warned about diminishing returns due to increasing investments into security, privacy and digital wellbeing initiatives implemented across its platform. Hence, promote real conversations over automated ones from businesses.
Meta also reported that it expects growth rates for operating income and earnings per share to slow down via 2020 due to increased expenses especially related to technology and infrastructure development costs; resulting from escalating campaigns against hate speech and other kinds of abuse while developing further tools designed to protect user data privacy following reports last year on misuse of user information by political consultancy Cambridge Analytica leading Facebook directly into controversies over data privacy violations scandal among other issues.
Slowing User Growth
Facebook’s stock suffered its biggest one-day drop ever on Thursday, plunging more than 26%, due to the company reporting slower user growth than expected. Facebook’s chief financial officer David Wehner said in the conference call that revenue growth would slow down significantly in the third and fourth quarter of 2018, due to declining user engagement in certain regions such as Europe.
Wehner shared that Facebook has seen “a combination of slower user growth, particularly in Europe and the strength of our advertising results continuing to vary by quarter.” Furthermore, he noted that the “risk to revenue growth going forward is heightened primarily due to ongoing currency pressures and uncertainty from recent product changes.”
The issue seems to have been caused by market saturation and a decrease in younger users joining Facebook, who are drawn instead toward Instagram or Snapchat. The slowing user activity impacts Facebook’s ability to monetize its platform via advertising, resulting in a dip in revenues later this year.
Data Privacy Issues
The company’s failure to protect and manage user data is at the heart of why Facebook stock plunges 26% following its biggest one-day drop ever. Despite the company’s attempt to repair its public image in the wake of the Cambridge Analytica scandal, added scrutiny from US regulators has caused investor confidence in Facebook to take a massive hit.
The Federal Trade Commission (FTC) has continued to investigate further into Facebook’s numerous data privacy violations which have motivated congressional lawmakers in other countries and internationally to review their regulations on data privacy. As a result, there is growing concern over how much access and control users have over their data, should they even have any.
The decline of user confidence in companies that handle personal information has grown exponentially as more evidence continues to surface; this, along with investors pulling out of a risky portfolio has led to Facebook’s one day drop of 26%. If any company missteps, further increasing public scepticism, there could be unfavourable consequences in their stock prices.
Impact
The news of Facebook parent Meta’s dismal earnings forecast has sent shockwaves throughout the financial markets. Its stock plummeted more than 26% in the biggest one-day drop ever on Thursday, wiping out billions of market capitalization. Investors are now panicking, as the effects of this one-day drop could have far-reaching consequences.
Let us look at this news’s impact on the markets.
Effects on Shareholders
Facebook’s record-breaking drop in stock price has caused a great deal of strain and uncertainty for many of its shareholders. In addition, investors have expressed concern over the potential ramifications on the tech giant’s user growth and future earnings, resulting in several large hedge funds selling off their positions.
Furthermore, reports suggest that some shareholders—particularly those with short positions—have come away with hefty losses due to the slump in share price. The company has predicted near zero revenue growth for the next quarter, leading to an overall negative sentiment surrounding the stock; experts are advising investors to take caution and be prepared for further market fluctuations on Facebook shares.
Additionally, with CEO Mark Zuckerberg having indicated he will not sell any shares in the next 12 months (as stated in his 2018 shareholder letter), volatility is expected to remain high as investors reprice their holdings according to Facebook’s revised outlook.
Effects on Other Tech Companies
The news of Facebook’s stock plummeting 26% in its biggest one-day drop ever had a ripple effect on other technology companies. With investors being more cautious about putting their money into tech stocks, it led to declines in the shares of other tech companies such as Google, Apple and Amazon. Google was down 4%, Apple 2% and Amazon 2%. The trend of caution amongst investors following the news is expected to continue in coming days, leading to further stock drops across tech stocks.
The effects have also been felt outside of the technology sector with markets worldwide taking a slight dip due to the news. According to FactSet data, all S&P 500 sectors were down Thursday, led by technology which was off 3.2% – its worst day since August 2011. The sell-off followed comments from Facebook CFO David Wehner who warned that revenue growth would decelerate substantially heading into 2019 due to changes in user privacy settings in recent months. Analysts fear this can be seen as a sign of an economic slowdown though opinions remain divided as some feel these are temporary issues.
Effects on the Economy
The drastic plunge in the stock of one of the world’s largest tech companies has a ripple effect across the global economy. It wiped out nearly $120 billion from Facebook’s market capitalization, with individual investors and mutual funds feeling the impact. Financial services companies, such as fund managers, asset managers and trade brokers, will also feel the effects through their portfolios.
Moreover, this fall in Facebook’s share prices has opened up deep concerns about other publicly traded technology stocks such as Amazon and Google. Analysts believe there is a possibility that these stocks may not see an upsurge anytime soon due to looming issues in terms of user privacy and lack of governmental oversight.
On a larger scale, Facebook’s biggest one-day drop ever has raised concerns over global economic stability due to its domino effect on businesses worldwide since many firms now have their operations owned by tech giants with large public shareholding. Over time, this could lead to decreased investor confidence, resulting in further dips in stock markets worldwide.
