Where Does Facebook Grow From Here?

In this segment from Motley Fool Money , host Chris Hill and analysts Matt Argersinger, David Kretzmann, and Aaron Bush try to put the massive one-day shellacking that Facebook (NASDAQ: FB) stock recently took into context. The 20% drop came when investors panicked after executives on the conference call forecast a steep long-term slowdown in revenue growth and a falloff in margins.

With shares now back where they were in May, it's time to take a deep breath and look at what those lowered guidance numbers really mean, and weigh the company's long-term prospects. In contrast, both Amazon 's (NASDAQ: AMZN) and Alphabet 's (NASDAQ: GOOG) (NASDAQ: GOOGL) second-quarter results were so strong it could be hard to pick out which aspects to highlight.

A full transcript follows the video.

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This video was recorded on July 27, 2018.

Chris Hill: Social media stocks are the headlines this week, so let's start with Facebook. After the social network issued its second quarter report, Facebook's market cap on Thursday fell by $119 billion. In terms of market cap, that is the single worst day in market history. David, a lot of parts to the story, but in terms of that fall, the Chief Financial Officer made it very clear that Facebook's revenue is going down by high single digits sequentially for the foreseeable future.

David Kretzmann: Yeah. 42% revenue growth for this quarter, which is an astounding number for a company that's already as big as Facebook. That number, I guess, could go down closer to 25-30% by the end of the year, so we're definitely seeing a slowdown there. What also stuck out to me is, they're guiding for their operating margin to drop from about 50% today -- which, let's take a step back and recognize, that's an incredible number. They're basically twice as profitable as Alphabet right now. That's incredible achievement. Over the next few years, they're guiding for that to go down to the mid-30s.

But, even if they drop down to an operating margin of 35% in the next few years, that's still above where Alphabet or Microsoft have been at any time over the past five years. I think we need to take a step back, take all of this in context. Facebook is still a dominant platform. They're seeing growth in their user counts, user engagement. This is still a very profitable company.

Aaron Bush: It's funny, because they've been telling us this was going to happen. And here we are, and it's happening. I think that's important to keep in mind. I do think there's some truth to the fall. Not that Facebook itself is peaking, but Facebook, the platform, in the U.S. and maybe in Europe, that might be starting to near a peak, with user growth tipping off. So, it makes it more important that Facebook's other areas, like Instagram, pick up the slack for a long time going forward. It also puts more pressure on them to figure out, "What do we do with WhatsApp, what do we do with Messenger?" If investors are starting to get antsy about future growth, then they need to figure out how to step up in other ways.

Matt Argersinger: Let's remember to take more things in context here. Facebook is at levels, I think, a few months ago, when the whole Cambridge Analytica thing came out, and Zuckerberg was testifying before Congress -- we're just at that level now. I feel like, the market cap that has been wiped away -- which is still an impressive number -- that's what Facebook has grown in the last three months, which is astounding by itself.

Hill: As you said, Aaron, Mark Zuckerberg has been very clear about this, very open about this, saying, "We're going to be spending a lot more money, we're going to invest in technology, we're going to hire thousands of people." So, you can look at the fall in the stock and say, "Wait a minute, we knew this was coming."

It's a different thing, though, when the CFO really spells out, in very clear numbers, "This is what it's going to look like." It's one thing to say, "Our margins are probably going to come down." Once you start to put real numbers against it, I think that's what caused what we saw on Thursday.

Kretzmann: Something that Mark Zuckerberg reiterated on the call is, they're running Facebook for the next several years. They're not trying to juice results for the next quarter or two. That really came through in this conference call. I think, as Foolish investors, business-focused investors, that's what we like to see. In the meantime, Facebook will probably still continue growing earnings above 20%, potentially even 25-30%. Right now, the stock is trading for a forward P/E of 24X. I would argue that a lot of the pessimism and that slowdown in growth is already priced in.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Aaron Bush owns shares of Alphabet (C shares), Amazon, and Facebook. Chris Hill owns shares of Amazon. David Kretzmann owns shares of Alphabet (C shares), Amazon, and Facebook. Matthew Argersinger owns shares of Alphabet (C shares) and Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Facebook. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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