Facebook's (FB) - Get Report tightening bottom line isn't a reason to bet against its longer term ability to recapture audience engagement and greater trust of users, according to Michael Pachter, an analyst with Wedbush Securities.
"Yes, I think the short-term sacrifice is intended to drive user satisfaction. A lot of the spending is safety, privacy, security related, but all of those are intended to keep customers happy with the service," Pachter noted. "I think that they will keep growing as they roll out products on Instagram and WhatsApp."
Facebook's plan to spend to enhance safety and security of the platform, and new products like Instagram TV and augmented and virtual reality, are the right move, he added.
"I accept the implementation of security new products will slow revenue, but it will grow," Pachter said of Facebook.
Facebook stock tumbled 19% Thursday to $176.26, after reporting second quarter earnings after yesterday's close with disappointing revenue of $13.2 billion vs. a $13.36 billion consensus estimate, and a 50%-plus increase in costs, expected to continue through the rest of the year.
The rout in the stock began after Wednesday's close when Chief Financial Officer David Wehner indicated the revenue growth rate had fallen 7 % sequentially, and projected high single digit drops in the third and fourth quarters. Long term operating margin guidance would be in the mid-30's range compared to 2018's 45% range.
The company's operating margin fell from 47% to 44%, according to the report.
Facebook's setback comes after a period when technology stocks have been hitting new highs helping push the NASDAQ Composite Index up 14% to 7,868.37 year to date.
Analysts lowered price targets for Facebook in the wake of the news, but in general recommended it to be a "buy."
"We ultimately believe the advertising revenues and underlying monthly and daily average user metrics were 'good enough' and show the worries of a massive fundamental and user deterioration at Facebook post Cambridge was more bark than bite," wrote GBH Insights analyst Daniel Ives, who gave the stock a "highly attractive rating."
A challenge for Facebook is to drive more user engagement through its currently less monetized "Stories," feature as opposed to its Newsfeed, Morgan Stanley analyst Brian Nowak said in his note Thursday.
"The drive for innovation is spurred by the need to adjust to user preferences, and is the right move for Facebook's long haul," he continued.
It looks like this "Story" might yet have a profitable ending.