He did it.
Facebook CEO Mark Zuckerberg decided it was time to pull the plug and reset.
After the data leak scandal, Facebook's torrid rise from the pullback of $157 to $219 was one of the best trades of the quarter.
Management felt this was the perfect time to snatch breathing room to fix the faults weighing down the business.
No doubt the daily pounding of negative stories crucifying Zuckerberg in the press took its toll.
Painting a picture of an out-of-touch-with-reality villain, stacking his cash in a luxury Palo Alto estate, did not sit well with Zuckerberg.
Flat North American daily active users (DAU) growth and a slight dip in European usership caused by General Data Protection Regulation (GDPR) was baked into the pie.
Investors already knew that.
Facebook even increased its average revenue per user in North America to $25.91 per user from $23.59 the quarter before.
There were many positives from the earnings report.
Revenue clocked in at $13.23 billion, slightly lower than expectations but nothing to cry your eyes out over and still a 42% YOY rise.
Then came the guidance.
In one word - cataclysmic.
Facebook dropped off a cliff in the aftermarket trading session sliding as much as 24%, a haircut of $150 billion of market share in a span of just an hour.
In all reality, the run-up to such towering levels ignited fears of acrophobia after a nine-year bull market leaving tech as the strongest pillar driving equities higher.
Profit taking was swift.
The same dilemma presents itself with many other top-quality tech stocks trading at all-time highs after similar parabolic moves up because the expectations are excessive.
Facebook rather chop down the tree now than face the music next quarter or the quarter after that, especially in a tech sector transforming at the speed of light.
Management said revenue growth rates would deteriorate "as much as high single digit percentages" in the second half of the year.
Uttering this one-line reversed investor's vertigo in Facebook shares.
This raises the question, has social media peaked?
No, social media is morphing with its users' needs and desires into something that might not look like the "traditional" social media of yore.
Instagram is the new growth driver for Facebook and could produce 20% of revenue by 2020.
Instagram is what Facebook was years ago with robust user growth and solid engagement numbers.
Facebook announced that comprehensive users totaled 2.5 billion users, which include Facebook, WhatsApp, and Instagram platforms.
Instagram's unit is expected to eclipse $8 billion in revenue in 2018.
The reset is code for Facebook's management believing the days of 40% revenue growth is over.
Decelerating into the 30% range is not game over for the stock.
It was bound to happen.
If you told most companies annual revenue would climb by 30%, they would be dancing in the streets.
Users' preference for a story-driven social media experience has made standard Facebook a relic.
Instagram is dynamic and a social media favorite for young adults and youth.
Videos and photos posted vanish in 24 hours catering toward the attention span deprived youth, while also shuttering out all the side bar noise streamlining the visuals.
Its sleek formatting is perfect for the mobile screen at a time when the migration to mobile is picking up a full head of steam.
It's the modern day social media of 2018 and betting the farm on this asset going forward is a risk worth taking.
Investors must remember when Facebook became popular and generated astounding growth numbers. Quality smartphone cameras, high-quality video performance, augmented reality, and photo editing apps weren't at the tip of the users' fingertips yet.
They are now.
Instagram is the response to that, incorporating all these new mechanisms to cater toward the new technology infiltrating our smartphone platforms.
When Millennials want to stay in touch with someone, they ask for an Instagram hashtag first and are shocked if you don't have one.
That never used to happen before.
Welcome to 2018.
The metrics reinforce the move to monetize Instagram.
Instagram recently surpassed the 1 billion monthly active user (MAU) number, up from 500 million in June 2016. Just only recently as September 2017, numbers were strong at 800 million.
Facebook does not disclose ad revenue, but many industry specialists believe Instagram could pull off a sensational year with revenue increasing 70% YOY in 2018.
Maintaining the 5% MAU growth won't happen forever as Facebook proved the past few quarters.
The metric maturation has unfolded the past few quarters forcing Facebook to focus on bumping up the average revenue per user.
Striking while the iron is hot makes even more sense and that means throwing all of its weight behind Instagram.
Facebook is not growing its users in the developed world and they need a response.
This is it.
Certainly, the 2018 version of social media is Instagram.
Social media will morph again in the future, who knows what it will look like, but when it happens, the eyeball migration will happen even faster than the monumental pivot to Instagram.
The network effect will ensure the ad dollars and usership will traverse over to Instagram. In some ways, Facebook is a legacy business in the throes of reinventing itself.
Lowballing next quarter's estimates was a shrewd move.
Notice the time horizon of companies turning into legacy companies is quickening, reinforcing cash-rich tech companies to bet big on a few projects in anticipation of market demand for a hot new industry.
Hits or misses are common, or if you are SoftBank's Masayoshi Son, just invest in all of them. Can't go wrong with that.
This trend speaks volumes of the innovation percolating throughout the corridors of Silicon Valley and why the American tech sector is the crown jewel of the American economy.
And we haven't even talked about WhatsApp yet, the chat messenger that Facebook pocketed for $19 billion in 2014.
WhatsApp has 1.5 billion MAUs and 450 million DAUs.
Brian Acton, the co-founder of WhatsApp, quit in disgust as Zuckerberg piled on the pressure to manipulate data in the same way Facebook has been doing for years.
This departure is the go ahead signal for Zuckerberg to start selling ads on the ad-less WhatsApp platform.
Ka-ching!
WhatsApp is next in line to be monetized after the Instagram pivot, and will harvest a whole new income stream channel for Facebook boosting the stock.
This is not a dead company by far, but tech companies must recalibrate as their cash cows become stale. It's the nature of the tech environment we have thrust ourselves in whether we like it or not.
What to do about the stock?
Allow the stock to show some consolidation around these levels. A strong support level is just below at $160.
We could get around that $160 level if we get a few analyst downgrades, which could be in the cards the next few days.
A long-dated, deep-in-the-money call spread incorporating strike prices around $140 would be worth pulling the trigger on if Facebook can demonstrate it can stay above the technical support.
Facebook has set itself up for an earnings' beat next quarter, as the deterioration it forecasts seems implausible to the extent management described it.
Management wants to shake out all the crud before the next move up commences.
We are entering into a new phase of Facebook. And Facebook has the brute resources and innovational prowess to readjust itself in a tech environment that has remarkably changed since 2017.
Facebook's New Lifeline
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Quote of the Day
"Computers are like bikinis. They save people a lot of guesswork," said former Chicago White Sox baseball player Sam Ewing.
