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Chart of the Day / Why it’s Best to Steer Clear of Social Media Stocks

Why it’s Best to Steer Clear of Social Media Stocks

July 31, 2018

Social media stocks have seen better days.

Facebook (FB) plummeted from nearly $220 to $170 after warning that it now expects user numbers to flatten over the next three years.

“In Facebook’s case, it is blindingly obvious that it cannot maintain its user growth rate. You have to be an insights idiot to base your health rating on that metric when the real question is how well it can leverage its existing user base to generate more revenue,” noted iWeb.  “New users coming on board Facebook now are typically going to be less income-producing than its existing user base. Growth in users is no longer a viable metric for Facebook investors, and analysts need to mature in their thinking in this regard.”

Worse, after noting that it’s likely to face lower profit margins for the next two years, it also reported that its average number of monthly users was 2.23 billion – which was 20 million short of expectations.

Worse yet, Facebook CFO David Wehner said shareholders can expect “revenue growth rates to decline by high single-digit percentages from prior quarters” for the third and fourth quarters. Revenue of $13.23 billion for the second quarter came in short of expectations as the company struggled with recent fallout.

That being the case, Facebook may no longer be considered a growth stock.

“You have a company that has expenses going up dramatically … [and] revenues are decelerating dramatically,” said Jim Cramer, as quoted by CNBC.  “That’s the prescription for a short sale.”

Then, Twitter (TWTR) fell from $44 to less than $32 in days.

After running nearly 80% in 2018, and despite news that it posted a profit of $134 million, Twitter still fell nearly 20% in recent days. That’s because user numbers fell by a million from the first quarter of 2018 to 335 million.

Baird analysts noted that the drop in monthly active users justifiably spooked the market.

“Twitter’s pace of execution on key growth initiatives (streaming partnerships, new ad formats, user engagement) is encouraging, but we think shares are likely to remain under some pressure until visibility improves for user growth and spending trends,” they noted.

In short, there’s growing fear of fatigue in social media user numbers, which is why we’re seeing such a great deal of anxiety among shareholders.

However, at some point, both stocks may become bargains once the news is baked in.  Remember, as Sir John Templeton once noted, “Buy excessive pessimism.”  Or as Warren Buffett would tell you, “Be greedy when others are fearful.”