Facebook (NASDAQ:FB) is one of the few tech companies that just keep crushing expectations. Quarter-after-quarter this social media giant produces profits which beat analysts’ forecasts, continually propelling its share price to new highs.
Revenue surged 47% during the first nine months of 2017 and its juicy profit margin remains a dream for most industry executives. Facebook generated $0.46 of operating profit on each dollar of revenue it made in the same period.
But after a 50% rally last year, it appears Facebook's stock could have a bumpy ride in 2018. Its shares plunged 5% on January 12 after the company announced that it plans to change the way it lets users consume news.
The move is intended to boost social interactions over stories from publishers. In other words, going forward, Facebook intends to help users have "more meaningful social interactions" instead of finding "relevant content.” In practice, this means that Facebook users will see less public content from businesses or publishers and more posts from their friends and families.
Mark Zuckerberg announced the changes in a post on his own Facebook page due to the sensitivity of this policy change on the company’s earnings. “I want to be clear: by making these changes, I expect the time people spend on Facebook and some measures of engagement will go down,” Zuckerberg said.
“But I also expect the time you do spend on Facebook will be more valuable. And if we do the right thing, I believe that will be good for our community and our business over the long term too.”
Revenue Implications
Facebook is changing its newsfeed following widespread criticism that the company let “fake news” proliferate over its social network during the last U.S. presidential election.This lapse may have given U.S. adversaries, such as Russia, an opportunity to manipulate the outcome, according to some observers.
As the probe into Russian involvement in the U.S. election intensifies, Facebook is pivoting away from publishers as a way of warding off any potential regulatory action against it. Is this change big enough to derail Facebook's revenue growth? That's the billion-dollar question, and I don’t think any analyst can estimate the impact as yet.
Judging from the Zuckerberg’s comments, however, it’s clear that the move isn’t revenue-neutral. And there will be some negative impact due to lost ad impressions, at least at the beginning. In the long-run, I think, this move is a net positive and doesn’t impact the company’s earning potential. Here's why:
First, this is a very clever move to keep regulators from dictating what Facebook should do about its content policy. Lowering the risk of a potential government intervention is a smart strategy and beneficial for the business.
Second, Facebook has many options available with which to make up for any revenue loss. One way is to use the popularity of its platform to squeeze more revenue from advertisers by hiking ad rates. Indications are that the company is already moving in this direction.
The number of Facebook ad spots increased 10% in the third quarter from the same period a year ago, while ad prices rose 35%. It was the second consecutive quarter in which the price of ads rose more quickly than the number of ads.
The company can also mitigate the revenue impact by improving growth on its Instagram platform and by monetizing its highly popular WhatsApp application. In a recent announcement, WhatsApp said it would begin allowing business accounts for the first time, a step that lays the groundwork for this free service to start making money for its parent, Facebook.
Is The Stock A Buy, Now?
Trading at $181.29 at the time of writing, Facebook stock has barely budged this year. For long-term investors, this level offers a great entry point, especially when the company is slated to announce fourth-quarter earnings Wednesday, January 31, after the close.
Despite all the noise about its newsfeed and declining ad spots, I think Facebook’s ability to generate superior returns for shareholders remains intact. As it has historically done, Facebook will continue to surprise in upcoming quarters, cranking out record profits.
Investors who may be waiting on the sidelines should take advantage of this short-term dip. I see Facebook stock touching the $225 level sooner than many analysts think.