A quick update from the public markets.
Chances are you have already read about Facebook’s quarterly results that sent its stock down sharply in after-hours trading. The trend continued this morning, with Facebook’s equity shedding around 18 percent of its value at the open.
The company’s repricing by public investors flips several narratives on their head. First, that Facebook’s model, and perhaps the social media corporate method itself, allowed the company to maintain operating margins in the 40s.
Facebook’s Q1’18 operating margin was 46 percent. In its most recent quarter, operating margin was 44 percent. Looking ahead, Facebook expects future operating margin to land in the “mid-30s on a percentage basis.”
Second, that leading tech stocks could do no wrong. It’s now well-known that a large chunk of recent market returns has been driven by outsized technology wins. The biggest tech companies — five of which were worth over $4 trillion recently — kept the public game afoot as a group, each putting up even better earnings results as time went along.
It seemed like that would persist in the second quarter, with both Alphabet and Microsoft beating expectations. However, Facebook’s disastrous earnings, coupled with Netflix’s disappointment, have dispelled some of the magic.
Each of these changes impacts startups. The first issue, the problem of rising costs related to running a social media company, implies that startups building inside the market niche can expect either higher content moderation costs at scale than they did before, or that they must find a different approach to growth. Slower growth, of course, is a contra-valuation tonic.
And the second lesson shows that the great valuation boom that added $1 trillion in value to the industry’s biggest winners in about a year could be coming to at least a pause, if not a long-term finale. If that is the case, more than just social-focused startups could see their worth nipped in the private markets.
But Facebook is harming itself and the yet-to-go-public alike. It’s also not a good day for Snap and Twitter either. The two firms that have long toiled in Facebook’s shadow as smaller, less profitable – and less consistent in terms of both revenue and user growth – public social media firms.
The Menlo Park Meltdown has Twitter down 3.5 percent as of the time of writing, and Snap is off 3.4 percent.
Notably, Twitter has worked through its own molting period in recent years, working to clean up Nazis and bots alike. Snap has fewer problems of that sort of issues but is a walking cost factory. So Facebook’s recent lessons still apply. Snap just started teaching them first, ironically.
Things are still fresh, and surprise from Facebook still new. Things may come back. But today you can be glad that you don’t run a hedge fund. The so-called smart money didn’t see any of this coming.