Facebook’s 3Q Growth Suffices to Stave Off Another Stock Dive

Xconomy San Francisco — 

Facebook (NASDAQ: FB) shares gained nearly 3 percent Tuesday, and ticked up further in after-hours trading following the release of a third quarter earnings report that showed some strengths as well as shortfalls. Investors have been concerned about the social media giant’s slowing growth rate in a year when it has been under scrutiny for data privacy violations and its role in the spread of false and divisive messages by fake user accounts traced to Russian agents during U.S. election campaigns.

On the strength side of the third quarter report: The company’s profit of $5.14 billion, or $1.76 per share, exceeded Wall Street expectations, Reuters reported. Although the number of daily users remained flat at 185 million in the United States and Canada, the company saw a rise of a million monthly users for the region.

But Menlo Park, CA-based Facebook’s revenue growth followed the pattern of deceleration the company had foretold as it released its second quarter numbers in July, when the market reacted by stripping more than $100 billion from its market capitalization. In the third quarter, revenue rose 33 percent to $13.7 billion compared to the same period a year ago. But that was a decline from the revenue growth rate of 42 percent for the second quarter of this year.

The third quarter brought Facebook the loss of a million users in Europe, where strict new data privacy regulations are giving users more control over the personal data collected and shared, and where government investigators have faulted the company for allowing third-party developers to extract user profiles without their consent. The U.K.’s data privacy regulator fined Facebook $645,000 last week for violations that allowed 87 million user profiles to fall into the hands of outside companies, including political marketing firm Cambridge Analytica.

In September, Facebook counted an average of 1.49 billion daily active users—a 9 percent rise compared to the preceding year and an advance over the 1.47 billion reported for June. However, Facebook is seeing the most growth in geographic regions that bring in the least revenue. The average revenue per user in the U.S. and Canada is $27.61; in Europe, it’s $8.82. For the Asian Pacific user, revenue is $2.67, and users in the rest of the world bring in an average of $1.82.

“We may be close to saturation in developed countries while we continue to see growth in less developed countries,” Facebook CEO Mark Zuckerberg said in an earnings conference call Tuesday.

Zuckerberg and other executives outlined a number of shifts and transitions that mark this period in Facebook’s business trajectory. For one thing, the company has been increasing its expenditures to beef up security and reform its privacy practices. Zuckerberg said the company had lagged behind in such efforts in prior years, and added that he expects it won’t be until the end of next year before “we’re as dialed in as we’d like to be.” But he said Facebook is making progress through measures like deploying artificial intelligence software to flag problem content such as terrorist messages and hate speech.

Facebook is also trying to move users and advertisers into new formats that don’t yet yield as much advertising revenue as its news feeds on Facebook and Instagram. The company is trying to foster growth in messaging and a style of social media sharing known as “stories,” in which people describe moments in their lives. Facebook is working with advertisers to design ads to blend in with these formats, which Zuckerberg says encourage more social interaction than activities like watching viral videos that don’t necessarily reflect the core interests of users.

The earnings news comes as Facebook is under a number of other pressures:

—The U.K. government announced a new “digital services tax” of 2 percent on the revenues drawn from the U.K. by search engines, social media platforms, and online marketplaces that make more than $638 million globally, MIT Technology Review reported. The tax, set to take effect in 2020, might inspire other jurisdictions such as the European Union to impose similar levies.

—When U.K. regulators last week fined Facebook $645,000, it was for violations of older privacy codes. But future fines for similar violations under the nation’s new privacy laws could far exceed that. Under the U.K.’s Data Protection Act 2018 and the EU’s stringent General Data Protection Regulation (GDPR), companies that violate data privacy protection requirements can be fined as much as $21.7 million, or 4 percent of a company’s annual global revenue.

—Shareholders have been benefiting from Facebook’s ability to generate billions in ad revenue by offering advertisers the ability to target ads to selected portions of the population, based on the personal data Facebook has collected about them. But this year, Facebook has lost market cap as well as user growth in high-revenue regions such as Europe and the United States, as its impact on privacy and the public discourse of nations draws increasing scrutiny. And some shareholders are calling the company on the carpet.

This week, impact investor Arjuna Capital and New York State’s big pension fund filed a shareholder proposal calling on Facebook to lay out in writing how it plans to fend off data breaches and fake users, while better guarding its network from being used to spread misinformation, incite hatred, improperly interfere with elections, and suppress legitimate free speech.

New York State Comptroller Thomas P. DiNapoli joined Arjuna in the shareholder filing, acting as trustee of the New York State Common Retirement Fund, which manages the retirement accounts of more than a million state and local government employees and retirees. The fund, which managed assets of $209.2 billion as of June 30, is the third largest U.S. public pension fund. Based on the fund’s figures, the pension fund lost roughly $257 million due to the drop in the value of Facebook’s shares since the beginning of the year.

—An overall bear market: Since Oct. 1, the Nasdaq composite index is down about 12 percent, and the Dow Jones Industrial Average has fallen about 8 percent.

Photo “Money!” by Flickr user Tracy O. Used under the Creative Commons 2.0 and 4.0 licenses. Photo cropped to fit Xconomy publishing system standards.