Facebook’s Terrible Timing and Why a Trade Deal Matters for Tech Stocks

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Many tech companies were seen as immune from trade tensions, but that benefit may now wane

Until Thursday, Facebook has been a standout stock this year. But its disappointing outlook comes just as investors might be less interested in shares that can weather a trade dispute.
When trade tensions were simmering, Facebook FB +0.88% was one of the stock market’s few shining spots. But just as worries about trade are easing, it has become anything but.

Up until Wednesday, Facebook was a standout stock in what has been a mediocre year, returning 23%. The S&P 500, in contrast, returned 7.6% — and would have returned 7.2% if it hadn’t been for Facebook, and 3.8% without the other top four big tech stocks. But the company’s disappointing results and worrisome conference call after the close Wednesday radically altered investor perceptions of how fast the social network could grow. Facebook shares fell 19% Thursday.

Part of Facebook’s appeal this year, and indeed the appeal of other highflying stocks such as Microsoft, Netflix and Google parentAlphabet Inc., has been that it was insulated from the trade worries affecting other companies’ shares. U.S. tariffs on imported steel and threatened tariffs on automobiles, retaliatory tariffs on motorcycles and bourbon — these aren’t things that matter much for fast-growing companies that sell services.

Facebook’s earnings came just hours after President Donald Trump and European Commission President Jean-Claude Juncker agreed to tone down the trade dispute between the U.S. and the European Union. Combined with the weak numbers, the tentative trade deal pushed investors to dump Facebook shares. The agreement dials down the fear, for now, that the White House will place a 25% tariff on cars and car parts — a move that could throw a wrench in global supply chains and had been weighing on stocks.

Heavy HittersContribution to the S&P 500’s year-to-dategain through July 25Source: S&P Dow Jones Indices
Amazon.comMicrosoftAppleAlphabetFacebook0%5101520

Facebook’s travails aren’t divorced from the political climate. The company has been hauled before Congress to answer for its role in the 2016 elections and its impact on wider society. Facebook’s warning of lower long-term profit margins that sparked Thursday’s selloff was driven in part by its plan to boost spending on security and safety — effectively a plan by Facebook to buy its way out of its problems.

Facebook’s operating margins have been the highest even among its big tech peers, so the company may also have realized that earning nearly 50 cents on every dollar of revenue looks unseemly when under such scrutiny.

While Facebook is under the most pressure, Google too is facing tough regulators. Google’s terrific numbers were weighed down by a $5 billion fine by the European Union, which said the company abused its dominance of its Android mobile operating system.

More generally, Facebook is also a reminder of what happens when tech companies priced for turbo-growth fail to live up to those targets. Netflix is still down 10% following last week’s second-quarter results that contained disappointing subscriber numbers. Amazon.com , up more than 50% this year, was down 2% Thursday ahead of its own second quarter report. Wall Street is looking for the e-commerce giant to post sales growth of 41% year over year for the period. Amazon’s sales grew by 25% in last year’s second quarter.

These are politically uncertain times, and as Facebook shows, what seems like a safe bet can suddenly shift.

Highlights From Facebook’s Stock-Sinking Earnings Call

Comments from Facebook CEO Mark Zuckerberg and CFO David Wehner on the company’s Q2 2018 earnings call Wednesday cast serious doubt about the social network’s seemingly unstoppable growth. Photo: Getty Images

Write to Justin Lahart at justin.lahart@wsj.com and Dan Gallagher at dan.gallagher@wsj.com

 

by wsj.com