As a key member of the “FANG stocks,” Facebook Inc (NASDAQ:FB) is so far living up to its potential. On a year-to-date basis, FB stock is up 38%, easily beating the benchmark indices. It’s also dominating rivals within the broad social media sector, including Twitter Inc (NYSE:TWTR), which is up 18%, and the disastrous Snap Inc (NYSE:SNAP).
But recent price action in Facebook stock has given investors significant pause. The social media giant got off to a shaky start this month with a 1.7% loss. Since June 23, FB shares are only up 3%. Against the broader context, the volatility, of course, is no cause for concern. After all, the company’s profits against its initial public offering is 316%, while its trailing five-year return is an astonishing 400%.
With all that said, social media isn’t exactly a stable industry. Twitter is showing signs of life, but only after hemorrhaging more than half its market value since its IPO. Snap isn’t getting any of the maiden-voyage love that’s commonly expected for much-hyped investments.
So despite how resilient and tough FB stock is, no company can completely ignore its industry fundamentals.
To their credit, Facebook is venturing out to other avenues to diversify away from its core business. As InvestorPlace contributor Jonathan Berr mentioned, FB is diving into the original TV-style content game. Although competition is fierce with names like AT&T Inc. (NYSE:T) and Amazon.com, Inc. (NASDAQ:AMZN), Facebook is hardly a fly-by-night operation. If anyone can do it, they can.
The question is, will they be successful?
FB Stock Facing Content Saturation
Certainly, Facebook has the capital and other resources to make a significant impact in the original content sphere. However, as Berr astutely notes, this market could easily reach what he terms “peak original content.” Almost any company with a shred of consumer-tech credibility is jumping on the bandwagon. Theoretically, it won’t take long before viewers are inundated with options.
If and when that happens, I have to wonder about the economics of it all. While FB stock is a tour-de-force, it can’t get too cute with its shareholders. As InvestorPlace writer Tom Taulli cautioned, “…there are relentless limits to growth. And Facebook could be approaching them. In fact, during November, the company’s CFO David Wehner warned of a ‘meaningful’ slowdown.”
Again, it doesn’t matter how great a company is, there’s no such thing as a guarantee. And forget about past performance or a strong track record. No shareholder wants to hear an admission like the one Facebook just delivered.
I also agree with another one of Taulli’s arguments when he cautioned about brand identity loss. He wrote, “However, there are some big-time challenges. After all, at the core of FB’s DNA is user-generated content. So going beyond this will require a much different mindset, such as allowing for more creativity and risk taking. There is also the potential problem of confusion for users. Why go to Facebook for premium content? Isn’t this for something like Netflix, Inc. (NASDAQ:NFLX)?”
Facebook Is King, But Challengers Abound
Herein lies what I believe is the biggest long-term problem for FB stock. As Taulli mentioned, Facebook’s core DNA is user-generated content. What happens if those content creators started demanding more?
This was the primary motivation for why I discussed Steemit, a blockchain-powered social media network. Rather than people generating content for a corporate albatross, why couldn’t they do this for their own financial benefit? On the Steemit network, popular content earns the “steem” cryptocurrency, which can be redeemed for bitcoin.
But Steemit could end up being the first of many waves of next-generation social media. A new venture called Yours.org has a similar approach to Steemit, with the primary exception being the reward structure. Rather than an internal cryptocurrency, Yours.org, once launched, will reward content creators in litecoin. Seeing as how litecoin is hovering around the $50 mark, this new platform has serious potential.
At the end of the day, I’m not looking for FB stock to collapse tomorrow. I believe it will work out the near-term kinks and will provide investors strong returns for 2017.
But I’m also not blind to the challenges. Facebook is the king of social media today, but that is absolutely not guaranteed to last forever. With both “traditional” and blockchain competitors, FB really needs to step it up into a higher gear to stay competitive, and dare I say, relevant.
As of this writing, Josh Enomoto is long bitcoin, litecoin and steem.
