Social Media Investors Sad Or Bad?

Michael Hedges July 30, 2018 Follow on Twitter

Social media investors are just like investors in any other business sector and stock traders are their foghorn. All growth - any growth - is good. Anything else, bad. As they mature dividends will drive their being. For publicly traded companies this is a problem.

Last week was a “bad week” or “black week” for social media firms, reported AP and AFP, respectively (July 28). Others called it “shock,” “agony” or “carnage.” All of this because growth-at-all-cost stock traders had a panic attack over the body count.

Facebook Inc. was first to rattle the betting parlor. The owner of the euphonious social network as well as Instagram and WhatsApp delivered, again, astounding Q2 financial results. It is making more money than anyone can count though in Q2 less than “Wall Street expected,” which means exactly what one should expect. But North American (read: US) users are not growing, actually diminishing in Europe while worldwide totals look to approach 2.4 billion by the end of this year. Stock traders and institutional investors, all living and breathing in the US, were horrified along with the stock market watchers who love them. The share price plummeted by nearly a fifth.

Being a publicly traded company Facebook Inc. is required in quarterly earnings reports to mention potential situations that might cause investors to lose their shirts or, at the very least, switch to a cheaper brand. Revenues, said the company, just might grow a bit less through the rest of this year. Not to worry, those nifty new investments like video-streaming service Watch will certainly pay-off in a few years.

More horrifying to the betting parlor was the company’s warning that operating margin, an ostentatious 44% in Q2, “will trend toward the mid-30s on a percentage basis” over the next couple of years. Operating margin is the difference between current revenues and current expenses, including capital expenses. In Q2 2017 the Facebook Inc. operating margin was 47%.

The cost of doing business is rising quickly, something the company has not glossed over in recent months. Adding new users, particularly in its big growth areas like India, is hardly a cost burden. Neither is raising the ad rates. Facebook is hiring in significant numbers, arguably on regulatory demands or the fear thereof. Investors and stock traders love robots, warm bodies not so much.

At the end of the week Twitter Inc. got into the same fix, almost the same but not quite. The company’s Q2 report showed a million users had dropped off, almost all in the US, 335 million monthly actives from 336 million in the previous quarter. Again, stock traders and investors howled, punishing the share price 17% even though the company has now been profitable three quarters in a row.

Some but probably not all the drop in monthly active users (MAUs) were from Twitter Inc. suspending or banning dodgy accounts. “We want people to feel safe freely expressing themselves and have launched new tools to address problem behaviors that distort and distract from the public conversation,” said co-founder and chief executive Jack Dorsey, quoted by tech portal endgadget.com (July 27). More is being invested, he said, in the “long-term health of Twitter.”

Regulators and politicians, arguably, see social media providers as in deep need of a new direction. “Companies like Facebook made it easy for developers to scrape user data and to deploy it in other campaigns without their knowledge or consent,” said UK Conservative Party MP Damian Collins in a statement, quoted by Reuters (July 28). “They must be made responsible, and liable, for the way in which harmful and misleading content is shared on their sites.” Regulation also irritates the stock traders.

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