Bill Jamieson: Making sense of giant share value collapses

It is the stuff of investor nightmares: a company with booming revenues, a soaring share price and global acclaim suffers the worst one-day stock market fall in US corporate history.

Facebook's CEO Mark Zuckerberg . Picture: Getty
Facebook's CEO Mark Zuckerberg . Picture: Getty

Welcome (or not) to Facebook, the stunning social media shooting star that seemed to have nowhere to go but up – yet whose shares last week plunged by $120 billion (£92bn), or almost 20 per cent, in just one day. By way of comparison, fast food giant McDonald’s is valued at $122bn on the New York Stock Exchange and US industrial giant General Electric is valued at $114bn. Facebook’s plunge was equivalent to a value vaporisation of these giants.

How could it happen? Isn’t the US stock market the most zealously analysed and regulated exchange in the world? What does this say about the much-hyped efficient market hypothesis – the view that everything that is known about a stock is in the price? Or the theory of rational expectations? If the market is so efficient and rational, how can such dramatic plunges be explained?

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Facebook – headed by Mark Zuckerberg, pictured right – was not the only social media concern to be savaged by a reversal of fortune last week. Shares in Twitter plunged more than 20 per cent to just under $35 a share despite reporting record quarterly profits – profits of $100 million, with sales up 24 per cent to $711m.

It is the suddenness of such falls – and for two of the most intensely watched stocks – that shatter private investor confidence and confirm the fears of millions that the stock market is no place for their savings.

The Facebook plunge came after it published its second-quarter results, which came in below investor expectations. User growth rose at its slowest rate in two years, and billions of dollars in spending, planned to improve privacy and track advertisers, it warned, would outweigh revenue gains.

Now this growth slowdown should not have been a surprise. For months Facebook has been embroiled in scandals, and customer concerns over breach of privacy, and EU regulation – the EU General Data Protection Regulation (GDPR) – combined to result in a three million fall in user numbers in Europe in the first quarter, to 279 million. North American users stayed flat at 185m.

Facebook has been the dominant social media giant for years, with more than 2.2 billion monthly active users at the end of June. But after years of virtually competition-free existence, it is facing a growth in rivals such as Snapchat, Instagram and YouTube. And a social media company cannot perform without consumer trust. Here it has suffered an enormous knock.

Twitter has also suffered a fall in user numbers – down by one million in the second quarter compared with the previous three months. Many fake accounts have also been deleted. Even so, the share slide came despite the company reporting record quarterly profits of $100m, with sales up 24 per cent to a better-than-expected $711m.

Even allowing for the likelihood that these initial share price collapses were an over-reaction, markets have learnt – yet again – the painful lesson of over-confidence and that “efficient markets” can produce stinging whiplash corrections.

Alliance Trust platform: a sorry tale

I cannot be alone in my disappointment that Alliance Trust may soon be throwing in the towel on its share dealing platform Alliance Trust Savings after “preliminary expressions of interest” from potential buyers. Well, disappointment up to a point. While I found the platform of the Dundee investment trust giant comprehensive, economic to use and well backed by research, it follows year upon year of setbacks, problems and losses – and promises from previous managements that ATS was about to turn the corner and yield worthwhile returns.

True, it has turned a £1.5m loss last year into a tiny profit of £23,000. But customer numbers have fallen from 113,317 to 110,402. And for the trust’s shareholders – and its management – it would mark a further retreat from indigenous management and control, the investment management process having been outsourced to Willis Towers Watson, which oversees a set of external fund managers.

Possible bidders include Scottish Widows. Talks are still at an early stage and “there can be no certainty”, says the company, “that the board of Alliance Trust will decide to sell ATS”. For the record, Alliance has held its fair value of ATS at £38m: a sad ending to a sorry tale.