Credit: Shutterstock photoWhen stock in a company is caught up in news-driven declines, two things matter more than anything. While the news is still news, the tone of the response from management has a big influence on the severity of the immediate drop, and once the media have moved on, the focus returns to the numbers.
Both things were evident yesterday as two big tech stocks that had been under serious pressure for a while, Facebook (FB) and Tesla (TSLA), showed signs of recovering from recent pummelings.
Facebook opened lower but by day’s end had jumped around three percent from the low, while Tesla’s day was even more spectacular. That stock also opened yesterday lower than Tuesday’s close but started to climb shortly after the opening and finished close to fourteen percent higher than its intraday low of $252.
Facebook’s bounce came as founder and CEO Mark Zuckerberg presided over a conference call with journalists shortly after the company revealed that the Cambridge Analytics “data scraping” scandal could have impacted as many as 87 million users. Zuckerberg’s words were a blend of contrition, he admitted that Facebook had made a “huge mistake” and revealed that this was not an isolated incident, and that changes were being made.
It was, it seems, a textbook example of how to handle scandal. Traders and investors evidently appreciated the fact that there was no denial, deflection or excuse making, and that it was evident that a comprehensive, long-term plan to mitigate the problem had already been formed.
It remains to be seen if Facebook’s users will be as forgiving or to what extent the changes will impact the company’s profitability, but for now Zuckerberg has allayed the fear and allowed investors to concentrate on their history of profitability.
At Tesla, Elon Musk would love to do the same, but there is no history of profits to point to. However, that stock’s recovery was also based on a combination of a reaction to bad news and solid numbers. Obviously, the ever-changing sentiment about the possibility of a trade war has been partly responsible for TSLA’s big drop, but other things have also negatively impacted the stock over the last week or so.
Most notable among them was the revelation that a Tesla involved in a fatal crash was on autopilot at the time. In this case, the response from Tesla was based on statistical evidence. There is something terrifying about crashes on autopilot that makes them newsworthy, but the data indicates that they are much less frequent than crashes in manually driven cars.
Tesla said in a statement, “No one knows about the accidents that didn’t happen, only the ones that did.” And went on to say that “There are about 1.25 million automotive deaths worldwide. If the current safety level of a Tesla vehicle were to be applied, it would mean about 900,000 lives saved per year.”
That is an effective counter to the negativity but, as with Facebook, once the current stories fade from the news, the long-term fate of TSLA will be decided by profitability above all else and good news on that front drove the stock higher. After a series of delays and disappointments, they released some good production and delivery numbers.
Even more importantly for the market, that improved production and delivery will lead to better cash flow. That in turn led Tesla to state in the report that they will not need to add more debt or issue equity to raise capital this year, something that had analysts worried recently.
In both cases, an effective response to negative news halted the short-term declines in the stocks, and that enabled traders and investors to concentrate on profits, historical for Facebook and projected for Tesla. That ability to confront and move on from bad press is extremely valuable.
It gives investors confidence in management and makes aggressively shorting either stock, even in the face of seeming doom and gloom, a dangerous thing to do. That is why so many long-term investors still see weakness in FB and TSLA as opportunities rather than problems and recovery looks more likely than further declines.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
