For the year, Facebook Inc (NASDAQ:FB) will likely not be a standout performer for investors. But hey, for a mega cap — with the market value over $347 billion — the 15.3% return is still pretty good.
Yet given the strong financials and hefty growth rate, it’s certainly understandable to think that Facebook stock still should have done even better in 2016. In the latest quarter, revenues soared by 56% to $7.01 billion and earnings came to $2.4 billion.
Of course, FB stock continues to crank out impressive growth with its user numbers. Consider that — during the quarter — the mobile DAUs (daily active users) shot up 22% to $1.09 billion.
OK, then why does it seem that there is anxiety with Facebook shares? What’s going on? Well, let’s take a look at three risk factors:
No. 1 Facebook Stock Problem — Growth
Let’s face it, the 50%-plus growth rate for FB is a temporary trend. In fact, the company’s CFO, David Wehner, noted: “As you get to mid-2017, we expect ad load will be a less significant contributing factor. As we slow ad load growth, we’re going to have a slowing in revenue as well.”
This statement was enough to quickly knock the stock off by over 5%. Yes, growth investors can be extremely fickle.
The problem with FB is gauging the extent of the deceleration, since the company does not provide guidance. So yes, there’s a risk of expectations getting out of sync with reality — which, by the way, happens often with growth plays!
No. 2 Facebook Stock Problem — Fake News and Bad PR
Fake news is a wildcard for Facebook stock. How much of it represents the company’s revenues? Actually, it’s far from clear. But even if it is 20%, this could be trouble for FB stock. The company has already taken actions to deal with fake news — and, with the election over, there will probably be a slowdown in monetization anyway.
Besides, FB certainly wants to maintain a strong reputation so as to attract top-notch brands. So being strongly identified with fake news is probably not a winning strategy. Hey, even the Pope has recently declared that it is a sin!
Although, fake news is just one of the bad PR problems for the company. Keep in mind that the company has been beset by many controversies, such as censorship (a notable example was taking down the famous photo of the “napalm girl” during the Vietnam war) and offering so-called “free internet” services in India that seemed more like a promotion of FB applications.
No. 3 Facebook Stock Problem — Innovation Issues
To remain competitive, FB has relied heavily on dealmaking. The fact is that Facebook stock would be worth a lot less if it did not buy Instagram and WhatsApp.
Unfortunately, the company’s internal development teams really do not have a good sense for creating their own cool products. If anything, FB has been mostly about copying features of other apps. This has been glaringly obvious with Instagram, which has knocked off Snapchat’s disappearing photos and direct messaging.
Oh, and some of the FB acquisitions have not panned out so well either. Take a look at the $2 billion deal for Oculus. While Mark Zuckerberg was prescient in understanding the potential for the VR (Virtual Reality) market, the execution has been underwhelming. Oculus Rift has suffered from a lack of compelling content, miscues on pricing and problems with the supply chain.
The bottom line is that the device has gotten little traction. According to the research from Canalys, FB is the No. 3 player in the market, having shipped only 400,000 units the year. Instead, it’s Sony Corp (ADR) (NYSE:SNE) that has taken the lead. Then again, the company was smart to leverage its hugely powerful PlayStation platform.
Something else: Snapchat is likely to remain a big-time aggravation for FB. The company has been growing at a rapid clip, with the app serving 10 billion video views a day (as of April). Snapchat also has a reach of 41% of the 18- to 34-year-olds in the U.S., which is a highly sought-after demographic.
And yes, the company continues to innovate. Its Spectacles — which are fashionable glasses connected to your smartphone and allow you to take photos and videos – appears to be the breakout hit for the holiday season, ginning up tons of buzz. The offering is actually an interesting case of Augmented Reality (AR).
Of course, Snapchat is also prepping for an IPO in the first half of 2017. In other words, this will not only provide lots of capital for the company but perhaps take away attention from FB stock.
Despite all this, the good news is that Zuckerberg has shown great leadership ability, as seen with the nice gain in Facebook stock over the past few years. After all, the shift to mobile was a huge achievement.
Yet the technology world can be dicey. As seen with companies like AOL, Yahoo! Inc. (NASDAQ:YHOO), Twitter Inc (NYSE:TWTR) and BlackBerry Ltd (NASDAQ:BBRY), success can quickly evaporate. So for holders of Facebook stock, it is definitely worth keeping an eye on how the company finds ways to deal its brewing issues.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
