What Wall Street may have missed at Facebook

Facebook co-founder Mark Zuckerberg lost US$15.9 billion (S$21.6 billion) as the firm's shares plunged on Thursday.
Facebook co-founder Mark Zuckerberg lost US$15.9 billion (S$21.6 billion) as the firm's shares plunged on Thursday.

NEW YORK • Mr Mark Zuckerberg lost more wealth in a single day than the entire market value of Nasdaq or Ralph Lauren. In fact, about 175 firms in the S&P 500 are worth less than the US$15.9 billion (S$21.6 billion) that vanished from the fortune of the Facebook co-founder as shares of the social media giant plunged 19 per cent on Thursday.

The loss is the biggest one-day wipeout of individual wealth ever recorded on the ranking, which started tracking the world's biggest fortunes in 2012. Other big Facebook investors also took a hit as disappointing second-quarter results obliterated US$119 billion of market value, the most ever in a day for a US company. Co-founders Dustin Moskovitz and Eduardo Saverin lost US$3.9 billion and US$2.2 billion, respectively, on the Bloomberg ranking, while chief operating officer Sheryl Sandberg lost US$100 million.

Wall Street firms and investment managers pride themselves on having a strong grasp of what is going on at large companies. In Facebook's case, they clearly did not, even though there was much that was concerning. Here are some of the things that were missed.

Social media is a hard business. Before even getting to the political and regulatory pressures on Facebook, it is important to remember that it's not easy squeezing digital advertising revenue out of the clicks and swipes of social media users.

The difficulties at Twitter and Snap in recent years have clearly shown this. How do you bring in new users, how do you keep them coming back, and how do you get them to click on ads?

Investors assumed Facebook was different. One of the biggest mysteries hanging over the company is whether its main Facebook website is becoming a drag on its business. If so, the company may be relying on Instagram and other products to bolster its growth, and they may still be too small to pick up the slack.

Facebook does not break out how much advertising revenue comes from each product. This prevents outsiders from assessing whether the main Facebook website is becoming stale in its most lucrative markets, the United States and Europe.

Wall Street was also too quick to shrug off political challenges. When the Cambridge Analytica scandal engulfed Facebook earlier this year, its stock nose-dived.

But the scandals and new rules may be creating an environment in which people become less enthusiastic about Facebook's platforms and use them less, further slowing growth in advertising revenue.

User numbers fell in Europe in the second quarter. Protecting Facebook from dangerous content is also expensive. The firm has made it clear it would spend large sums (though it does not disclose how much) to prevent election meddling and stamp out hate speech, but investors may have underestimated the costs.

BLOOMBERG, NYTIMES

A version of this article appeared in the print edition of The Straits Times on July 28, 2018, with the headline 'What Wall Street may have missed at Facebook'. Print Edition | Subscribe