Something Is Wrong at Facebook

Facebook stock was down over 20 percent in after-hours trading yesterday after the company announced earnings that missed expectations, along with expectations of slower growth in the future. The drop, which was the largest single decline in the firm’s history as a public company, wiped more than $100 billion from the company’s market value.

It wasn’t the first time Facebook’s shares had plunged. Back in March, after the Cambridge Analytica scandal came to a head, the stock shed 18 percent of its value over two weeks. But since that low, it had risen to day after day of new, all-time highs—up about 70 percent overall. That recovery made the company seem unstoppable, even in the face of its role in data extraction and election manipulation.

This time, there’s no single reason for Facebook’s reversal. Instead, a combination of factors is creating headwinds for the company, and that’s not going to stop anytime soon. But even so, Facebook has enormous room for growth, and taking this setback as a sign of the company’s overall decline is wrongheaded. For better or worse, Facebook is fine, even if it is also terrible.

Wall Street can be fickle, overreacting to short-term bad news. And on first glance, it seems like Facebook’s Q2 results were pretty good. The company beat earnings estimates, and it missed revenue expectations by less than 1 percent—bringing in $13.23 billion instead of the $13.34 billion that analysts had expected. But on the earnings call, Facebook executives issued several warnings that startled investors.

Facebook’s chief financial officer, David Wehner, warned that its revenue growth would slow over the remainder of the year. Wehner also said that the company’s profitability would slow. Its operating margin has almost reached 50 percent in the past. That’s an incredible number—Google and Apple often reach only 25 to 30 percent. Wehner urged investors to expect that figure, 44 percent for the current quarter, to trend toward the mid-30s in the future. The reasons amount to investments in new products and services, and changes related to privacy and security. Facebook’s user growth also slowed, and actually dropped in Europe, thanks to the effects of the European Union’s General Data Protection Regulation (GDPR), which went into effect in May.

For Facebook’s critics, the crash had moral implications. At last, the company’s misdeeds might be catching up with it. But a single bad day—one that hasn’t even concluded as I write this—says very little about its performance over time. With the exception of the March calamity, driven by election scandals and the company’s questionable responses to them, many of Facebook’s stock dips tracked with fears about its ability to continue to increase profits at its prior rate, the apparent cause of a 5.5 percent drop in November 2016, for example.

Now that the company has confirmed that its humongous profits might decrease to just massive ones, Facebook looks like a different company for investors. In particular, Facebook stock is a popular holding for hedge funds, which might have decided that lower future profits suggested it was time to redistribute capital.

As a public company, Facebook’s stock performance has an impact on how it manages its products and services, which has an effect on its users. And there’s reason to believe that this moment might inspire more substantial changes for the billions of people who use Facebook’s offerings, which include Instagram and WhatsApp.

One problem is users. Yesterday, for the first time, Facebook shared that it boasts some 2.5 billion users across all its services. There are 7.6 billion humans on the planet, and somewhere between 3 and 4 billion of them have internet access. That gives Facebook plenty of room for growth, in theory, but reaching new users is hard and expensive. Facebook recently abandoned its effort to deliver internet service by drone, one possible way of reaching that last couple billion of latent, offline users. Mark Zuckerberg’s Internet.org initiative, meanwhile, has helped only about 100 million people come online. And now that it’s clear that privacy regulations such as GDPR are reducing user growth and activity, people’s attention might slowly slip away to other activities. Hoaxes, fake news, and Zuckerberg’s own commitment to helping people spend less time using his products further erode that activity.

That matters because Facebook is in the attention business. Its revenue comes almost entirely from advertisements. The more ads it can show to users across its platforms, and the more money it can charge for those ads, the better its bottom line. Advertisers certainly haven’t abandoned Facebook and Instagram, but users are increasingly irritated by ads on those platforms. As the “Stories” format becomes more popular on both Instagram and Facebook, the company has to figure out how to deliver ads in a different context. And Facebook still hasn’t managed to figure out how to build an ad business in its other big property, WhatsApp, which boasts 1.5 billion users all on its own. Two of WhatsApp’s founders quit Facebook earlier this year, partly due to clashes with their parent company over the privacy compromises that would likely be required to make the service a viable ad platform.

Even so, there’s plenty of room for growth. Reaching more users who are already online but not using Facebook services is more complicated, and expensive, than reaching the ones who already are. But it’s certainly possible. GDPR and the new wave of privacy measures that might follow it are a setback, but they might introduce new opportunities for Facebook. The Bloombergcolumnist Matt Levine even speculates that, in the West, users might be willing to spend $60 a year to use the “somewhat more chill version of Facebook” that regulation and scandal is ushering in. WhatsApp’s founders (and its users) may hate the idea of turning it into another advertising venue, too. But that doesn’t change the fact that there is a 1.5-billion-person market in that product that Facebook hasn’t activated at all.

There’s a danger in responding to financial news as if it’s news about technology, or news about culture. It’s easy to point to 20 percent drops in a stock, $100 billion losses to market capitalization, or $18.8 billion losses in net worth—that’s the hit Zuckerberg took personally today, at its worst—as if they mean more than they do. As if they portend the clear and obvious obliteration of a business or a sector. But Facebook is a giant enterprise, worth more than half a trillion dollars, whose products billions of people use every day. Most of those people don’t care a whit about the stock market, and they’ll tolerate any changes Facebook and its subsidiaries roll out as a result of pressure from Wall Street.

Even so, there is one place where that pressure might eventually make its way down to the users and products: the role of Mark Zuckerberg himself. After today’s rout, at least one large, institutional investor called for Zuckerberg to be ousted from the position of chairman, while retaining his role of CEO. It’s not the first time such an idea has come up, and Zuckerberg’s majority vote in corporate governance makes it hard to impose such a change. The company has long resisted it on the grounds that it would cause “uncertainty, confusion, and inefficiency.” But money talks, and sustained pain in the market, could convince the company to change its tune. Such a change would mark a new era for Facebook. Even if unlikely, it points to a remarkable meeting of the minds between ordinary people, media critics, and Wall Street insiders: If there’s a problem with Facebook, it’s not just hidden in the esoterica of financial fundamentals, or in the duplicity of messages shared on its platforms, or in the bad feelings its products sometime engender. It’s in the company’s very essence.