• Facebook shares are down ~20% after hours based on a combination of a slight miss in user growth along with guidance calling for a deceleration in revenue growth.
• We expect analysts will revise growth expectations from 27% in CY19 to 17-20%.
• The unprecedented guide down was attributed to the law of large numbers FX, and GDPR (engagement).
• Given the magnitude of the guide down, along with Facebook’s guidance history, this suggests the company could have been overly conservative.

The guide down

Facebook had given some warnings that this may happen, specifically on the Mar-18 earnings call, where the company mentioned the GDPR rollout in Europe will likely have a negative impact on user growth. That, in fact, did happen, as the company lost ~1M users in Europe (less than 1% of European MAUs). The magnitude of the guide down likely includes an assumption that user engagement will be negatively impacted in the future, as GDPR-like regulation rolls out worldwide. We believe we’re entering a new period of the Facebook story where engagement is more directly correlated to revenue growth. This is different than the past few years where revenue growth has significantly outpaced engagement.

Management likely being conservative

Cautionary comments on earnings calls are nothing new to the Facebook story. The company has a track record of resetting revenue growth and expense expectations only to turn around an exceed those expectations the following quarter. We suspect Facebook is sticking with its historical playbook and will, in fact, beat these lower numbers. That said, this does represent a new two-year growth profile for the company in the 15-20% range vs. 30%+ expectations.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.