4 ways Wall Street was so wrong about Facebook

For years, investing in Facebook was an easy win. Its shares have been in a relentless uptrend since its post-IPO unpleasantness ended in 2013, rising nearly 10-fold since then. 

The company captured the zeitgeist of the social media revolution. Its $1 billion acquisition of Instagram in 2012 helped it fend off would-be usurpers like Snap as the younger cohort shuns Facebook for "Insta" and its legion of influencers.

Facebook was the most widely held stock by hedge fund managers, according to Goldman Sachs. And heading into Wednesday's after-hours earnings report, 44 analysts carried a "buy" rating. Just two thought it was time to sell. But they were right: Shares closed down nearly 19 percent on Thursday after that latest quarterly report showed stalled user growth in North America, tepid profitability guidance and a warning about rising expenses. 

As a result, Facebook lost about $119 billion of its value, marking the biggest one-day loss in U.S. market history. That exceeded Intel's $91 billion loss in one day in September 2000, according to Bloomberg data. And the value of founder Mark Zuckerberg's 13 percent stake in Facebook dropped by more than $12 billion in less than 24 hours, to around $74 billion.

The social network's problems are manifold and now clear as day:

  • While there has been no regulatory fallout from the Cambridge Analytica privacy scandal earlier this year, the company has been forced to throttle back its efforts to monetize user data, which was a promising source of high-profit revenue. 
  • Efforts to embrace content from third-party publishers gave way to a fight against "fake news" and the need to hire actual humans to sift through it all. 
  • New efforts, like the purchase of Oculus to push into virtual reality, aren't large enough to generate meaningful earnings but are sucking up more and more capital spending. 
  • And a shift toward short-play video "Stories" for ad impressions is weighing down average revenue per user metrics. 
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And above all, according to UBS research, people just aren't that interested in scrolling through their Facebook feed anymore. Most critically, teens and millennials are the ones pulling back the most. And they're not only spending less time in front of a screen, they're also interested in other platforms, like SnapChat and YouTube. 

If all this wasn't enough, analysts had another clear warning sign: Zuckerberg has ramped up sales of his company's stock this year, selling an average of 733 million shares per month in 2018 vs. just 75 million per month in 2017 and 79 million in 2016. He didn't sell at all between 2013 and 2015, when the stock price was tearing higher. 

Zuckerberg's sales are part of a pre-arranged stock sale plan to fund his philanthropic efforts. But the timing could hardly have been more perfect: Facebook's decline, at one point, resulted in the loss of more than $150 billion in market value. That made it the biggest stock collapse in history

Blinded by groupthink and chasing momentum, Wall Street professionals were caught wrong-footed. That could call into question the true belief fueling optimism in other "FAANG" big-cap tech stocks like Amazon and Apple. 

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.