Facebook, Inc. Stock Has an Important Year Ahead

Facebook stock - Facebook, Inc. Stock Has an Important Year Ahead

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After being a long-time bull on Facebook Inc (NASDAQ:FB), I’ve become more cautious toward Facebook stock in 2018. And it looks like the market has done the same.

Indeed, I wrote ahead of the company’s fourth-quarter earnings report at the end of last month that it looked like a particularly key release for Facebook. Unsurprisingly, Facebook’s headline numbers crushed consensus estimates again. But what I thought would be more important was the company’s commentary, particularly around the news feed changes detailed by CEO Mark Zuckerberg last month.

So far, it doesn’t seem like Q4 has changed the case all that much. Facebook stock rose after the report, but then tumbled amid broad market weakness over the next few sessions. As the market has strengthened, so has FB, which now sits about 5% off an all-time high reached just after the report.

In other words, it looks like a split decision — for now. But the key questions facing Facebook stock are likely to be answered over the next few quarters, which could be good news, or bad news, for FB shareholders.

Facebook’s Growth Is Slowing

Somewhat simplistically, Facebook’s business is based on the following factors:

  • Number of users.
  • Time spent on the platform per user.
  • How many ads a user sees (ad load).
  • Ad pricing.

Again, that’s an imperfect model — but it gets to the core of the matter here. In terms of growth, Facebook can add users, it can have those users spend more time on the platform, it can show them more ads and/or it can price those ads higher.

From that perspective, it’s easy to see how Facebook’s growth can slow considerably — and quickly. User growth continues, with daily and monthly users rising 14% year over year in the fourth quarter. But that growth is slowing. Unspecified “product quality changes,” per the Q4 call, hit growth in the U.S. and Canada. Overall, Facebook, incredibly, has over 2.1 billion monthly active users — meaning, at some point, a ceiling is likely on the way.

Meanwhile, the news feed change led to time spent on Facebook to decline 5% in Q4. That metric should be pressured for the near term. Ad load generally gets pressured as mobile use rises; it appears unlikely that Facebook is going to increase the amount of advertising seen at this point (though commentary on that point has been limited of late).

Pricing continues to rise, and the headlock that Facebook and Alphabet Inc (NASDAQ:GOOGL) unit Google have on US digital advertising growth appears intact.

Overall, the combination is enough to keep growth intact. But growth already slowed modestly in 2017 — albeit to a still-impressive 47% — and Facebook guided for more deceleration in 2018. The concern is how quickly that deceleration might come — and how sharp it might be.

What Can Go Wrong for Facebook Stock

All four of those basic pillars have concerns at the moment. Reports again have circulated that Facebook is losing users to Snap Inc (NYSE:SNAP) platform Snapchat. Will Ashworth, on this site, argued investors should look past that concern and, in a vacuum, he’s probably right. But with growth likely to slow simply because so many users already are on (and using) Facebook, the platform likely is going to have rely more on increasing revenue per user rather than the actual user count.

Time spent very well could decline for the next few quarters. Zuckerberg has argued that a better experience means time spent will start trending back up, but that’s not a given. If ad load stays relatively flat, then the only way to increase revenue per user is through pricing hikes.

That strategy should work — probably. Facebook’s sheer data allows for impressive ad targeting. But rules such as the General Data Protection Regulation in the EU, and potential regulatory pressure in the U.S., might limit the company’s ability to collect — and use — that data.

However you look at it, this is a business that is maturing — and one that could mature very quickly. Meanwhile, expenses are rising, guided up 45-60% in 2018 alone. The combination of slowing revenue growth and rising expenses creates a key risk to Facebook stock at the moment.

FB Remains Cheap, but Be Careful

That’s in addition to the more obvious risks here. Users simply could get tired of Facebook. Another social media platform could, unlike Snap and Twitter Inc (NYSE:TWTR), become a more significant rival. Amazon.com, Inc. (NASDAQ:AMZN) is ramping up its advertising business, which could limit Facebook’s pricing power.

Admittedly, at just 21 times forward earnings per share, some of these risks are priced in. And I’m not recommending investors go fleeing from Facebook stock.

But the slam-dunk bull case I’ve seen for much of the past few years isn’t quite as simple. There are real risks here — and a lot of questions to answer.

Facebook will have the opportunity to renew investor confidence this year, but there may be a few bumps in the road.

As of this writing, Vince Martin has no positions in any securities mentioned.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/facebook-stock-important-year-ahead/.

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