It had become an article of investor faith on Wall Street and in Silicon Valley: Quarter after quarter, year after year, the world’s biggest technology companies would keep raking in new users and ever-higher revenue. And with that, their share prices would continue to march upward, sloughing off any stumbles.
Last month, that myth was shattered. And investors responded by hammering the stock of Facebook, one of the world’s most valuable companies. Shares of the social media giant fell 19 percent, wiping out roughly $120 billion of shareholder wealth, among the largest one-day destruction of market value that a company has ever suffered.
Investors dumped Facebook shares after the company reported disappointing second-quarter earnings, in which the company warned of a sharp slowdown in sales growth in coming quarters along with rising spending on security and privacy enhancements.
The sudden drop also amounted to a test of the giant, technology-focused stocks that have carried the market for much of the year. Before Facebook’s tumble, more than half the returns in the Standard & Poor’s 500-stock index this year had been provided by just a handful of technology-related stocks, said Savita Subramanian, an equity strategist at Bank of America Merrill Lynch.
In recent years, investors — from individual traders to the world’s largest hedge funds — have snapped up shares in these companies, which include Facebook, Amazon, Apple and Google’s parent company, Alphabet. These tech giants were viewed as having nearly unassailable revenue streams that could deliver profit growth regardless of economic conditions.
As a result, their share prices soared. This year alone Apple is up some 15 percent; Alphabet has gained more than 20 percent; Amazon has surged more than 50 percent; and Netflix is up nearly 90 percent.
Facebook’s stumble suggests that some of these stocks — as well as the broader market — could be particularly vulnerable if their financial results don’t live up to investor expectations.
Until Thursday, Facebook was enjoying enormous gains. The stock was up more than 23 percent for the year, before it reported earnings after Wednesday’s close. By Thursday afternoon, all of its gains for the year had vanished.
It was the details of Facebook’s report that seemed to spook investors. The company’s quarterly revenue fell slightly short of meeting the expectations of Wall Street analysts. And executives warned that the company would invest heavily in privacy and security, and that revenue growth would most likely slow in coming quarters.
Still, Facebook’s sharp drop seems to have had a limited effect on the broader market, which has shown signs of gaining traction in recent weeks as companies largely reported strong second-quarter earnings.
It’s quite possible that Facebook’s shares could recover and continue to climb. In March, the company’s handling of user data in the Cambridge Analytica scandal contributed to a backlash against the size and reach of the biggest tech businesses and raised concerns that regulators may soon crack down on these firms. Shares of Facebook fell 17 percent in the days after news broke. By May, the company had erased those losses.
Still, the sheer size of Facebook’s fall on Thursday became a focus for investors. The decline in Facebook’s market value was roughly equivalent to the entire value of some of the country’s best-known companies, including McDonald’s, Nike and the industrial conglomerate 3M.
There are few examples of single-day losses so large. In September 2000, as the tech stock boom turned to bust, the chip maker Intel warned that its sales could slow, sending its stock price down by more than 20 percent. The rout knocked $91 billion off its market value in a day. Adjusted for inflation, that loss would be more than $130 billion in 2018 dollars, greater than the value Facebook lost on a single day last month. But given the vast market value of today’s tech giants, and the fact that 20 percent declines in share prices are not unheard-of, the size of the losses shouldn’t be surprising.