Controversy catches up with Facebook, investors abandon ship after earnings call

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Controversy has finally caught up with Facebook. The social media giant which appeared invincible, despite being embroiled in fake news, hate speech, fake accounts and election manipulation scandals finally faced the music on Wednesday.

Facebook, in its quarterly earning call, said that accumulation of issues was starting to hurt its multibillion-dollar business. Following this the stock lost almost $150 billion in two hours in market capitalization. Shares of the social media giant slid 20% on Wednesday.

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Not only will it cost much more than expected to resolve the privacy and security issues but revenue growth will also slow down at least till the end of 2019. In other words Facebook will be a much less profitable company for the next several years.

Growth in digital advertising sales and number of its users also decelerated in the second quarter. The company’s leaders, including its chief executive, Mark Zuckerberg, added that the trajectory was not likely to improve anytime soon.

What took the investors by surprise was that the user growth in the US and Europe—Facebook gets 70% ad revenue from here —has not grown. Its monthly average users in the US at 241 million didn’t grow at all, and monthly average users in Europe actually fell slightly to 376 million from 377 million. The decline in Europe, Facebook said, was partly because of new privacy rules, or General Data Protection Regulation.

Facebook has grappled with months of scrutiny over Russian misuse of the platform in the 2016 American presidential campaign and the harvesting of its users’ data through the political consulting firm Cambridge Analytica.

Facebook was expected to spend roughly an additional $1 billion annually to harden its platform. But Peter Wehner, Facebook’s chief financial officer, said that investment in safety and security will be much more, amounting to “billions of dollars per year,” and helping to drive up expenses by 50% to 60%. Wehner hinted that those trends would continue. In 2019, he said, expenses would grow faster than revenue.

Facebook posted more than $10 billion in profit for the first half of this year.

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