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Facebook Shares To Slump As Zuckerberg Searches For New Revenue Sources

Published 11/02/2018, 03:00 AM
Updated 09/02/2020, 02:05 AM
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After a year and a half of turmoil triggered by controversies involving fake news, political manipulation, and data breaches, Facebook Inc. (NASDAQ:FB) is entering a new phase: the social media giant is willing to compromise on its growth momentum while it tests new ways to make money.

That was the main message from the company’s third quarter earnings report on Tuesday as well as Mark Zuckerberg’s call with analysts that followed. In a broader sense, the company doesn’t currently see a straight-line growth trajectory which investors have become so used to since the company’s IPO in 2012.

The biggest challenge that Facebook has to overcome in 2019 is to make up for the lost revenue from its flagship News Feed product which is under major transformation after it became a tool for political manipulation and the spread of misinformation.

In his call with analysts, Zuckerberg presented a game plan to achieve future growth. He is shifting his focus to video and disappearing posts called "Stories" to attract advertisers instead of News Feed. But the problem with that approach is that it won’t produce immediate results and it’s very much a work-in-progress.

“We have great products people love, but it will take us some time to catch up,” Mark Zuckerberg said in the conference call. “It will take some time, and our revenue growth will be slower.”

Facebook does not charge as much for advertisers to run ads on “Stories” as it does in the News Feed, so shifting to ephemeral messaging may not be as lucrative. The other problem is that marketers aren’t yet comfortable with this medium as tools to make ads for “Stories” are not yet fully developed.

Morgan Stanley, in a research note to clients, said that the switch to ephemeral messaging will produce a short-term headwind to Facebook as monetization through “Stories” is likely to be 30% lower than News Feed.

The primary power of Facebook’s platform is that it helps companies target their ads to the right audience for each product or service. This monetization of user data is the key to Facebook’s success and to the continued upward trajectory of its share price.

Slowing User Growth

The struggle to move advertisers to more complex ways of communicating with their target audience will only be successful if Facebook is able to achieve growth in its user base. The third quarter earnings show that the growth in daily users in the U.S. and Canada—the company’s most important profitable ad market— is plateauing, and it’s slowing in the European Union where Facebook lost one million daily users during Q3, partly because of tough new data privacy regulations that were recently implemented.

Weekly Facebook Chart

Facebook stock is currently trading at $151.75 per share. With revenue from the company’s core News Feed product slowing and user growth in the key markets stalling, the outlook for Facebook shares is uncertain in the next 12 months. That means long-term investors shouldn’t expect a quick rebound after Facebook shares lost more than 30% since reaching a record high in July.

Despite this challenging environment, we still believe that Facebook is one of the best contrarian bets in the technology space due to the company’s massive economic moat. Facebook and Instagram are the two largest media assets in the world, while its Messenger and WhatsApp are the two largest messaging services. The Q3 earnings show that advertisers are still glued to Facebook platforms as they don’t see an alternative as powerful and far-reaching as Facebook.

Bottom Line

Any recovery in Facebook’s stock largely depends on how quickly Mark Zuckerberg is able to improve the platform’s security and make it free from political manipulation and misinformation. In our view, it will be a long journey that will see many ups and downs.

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