Ahead of Facebook’s earnings, Wall Street was highly confident. A week before, the shares went from $209 to $217.50, putting the market cap at $629 billion -- making the company the fifth most valuable on the face of the earth.
SUN VALLEY, ID - JULY 13: Mark Zuckerberg, chief executive officer of Facebook, checks his phone during the annual Allen & Company Sun Valley Conference, July 13, 2018 in Sun Valley, Idaho. Every July, some of the world's most wealthy and powerful businesspeople from the media, finance, technology and political spheres converge at the Sun Valley Resort for the exclusive weeklong conference. (Photo by Drew Angerer/Getty Images)
Ahead of Facebook’s earnings, Wall Street was highly confident. A week before, the shares went from $209 to $217.50, putting the market cap at $629 billion -- making the company the fifth most valuable on the face of the earth.
But in techland, things can move very quickly. And yes, that’s what happened today with Facebook.
Bottom line: The earnings report was downright scary, as the growth machine suddenly decelerated. Even worse, the slowdown appears to be more than just a quarterly blip. Investors are now adjusting to the new reality that growth could fall-off for the next couple years.
In light of this, it is no surprise that Facebook stock plunged 20% in after-hours trading.
OK then, so what might the longer-term impact be of this -- say for startups? Well, this may seem more like something specific to Facebook. After all, the company must deal with the “law of large numbers” as the user base is massive. Next, Facebook has become the fat target of various controversies, such as with the problems stemming from its dealings with Cambridge Analytica. Note that CEO Mark Zuckerberg had to testify before Congress because of the missteps.
But despite all this, I still think founders should be concerned. Hey, as the legendary Intel CEO, Andy Grove, once noted: “Only the paranoid survive."
Then what are some of the takeaways for startups from the Facebook implosion? Here's a look at three:
#1 - The Ad Market
Look at any forecast and there should be robust growth for the digital ad market. Let’s face it, people are shifting away from TV and spending more time with their smartphones. Besides, digital ads provide for sophisticated targeting, personalization and tracking.
Yet maybe the projections are too rosy? Perhaps so. While Facebook did not comment on the overall trends in the market, it does seem reasonable that the company is getting concerned. Just some of the issues include the problems with performance as well as maturation in markets like the US. What's more, there is the potential of a recession, in which companies take a knife to their ad budgets.
In other words, in the years ahead, it’s probably a good idea to be more realistic with the growth projections.
#2 - User Changes
The big shocker with Facebook’s earnings report was the user growth – or lack thereof. The second quarter was actually the slowest on record. Consider that the DAUs (Daily Active Users) grew by a measly 1.44%, down from 3.42% in the prior quarter. There was, in fact, a decline in Europe.
Part of this downtrend was due to Facebook’s moves to allow users to make their accounts more private. Oh, and yes, there was the impact in the EU from the GDPR initiative.
As users think more about their privacy, they are making it tougher for online platforms to monetize activities. And if this winds up being a secular trend, then consumer Internet companies may have to rethink their business models, such as by implementing subscription plans.
#3 - Costs
Modern Internet services are getting much more expensive. This is especially the case with online video – which is becoming a must-have. In the meantime, the compensation packages for talented coders continue to escalate, with no letup in sight.
Even for a company of the scale of Facebook, the costs are becoming a major drag. According to the earnings call, management said that operating margins will plunge from 44% to the mid-30s (keep in mind – that a year ago – they were 47%).
But of course, startups are in a much different predicament. They do not have the huge resources to fight this battle, even if they can get slugs of venture capital.
Now this does not imply that there will be Armageddon for startups. Definitely not. But the Facebook quarter seems to hint at some tougher times ahead -- and founders probably should factor this into their strategies.