There should no longer be any doubt among investors that Facebook, Inc. (NASDAQ:FB) is facing a backlash from users, activists and governments.
While the other cloud czars have a variety of businesses with which to fill their clouds, such as commerce, search, software, and paid services, Facebook is only supported by advertising.
Top-line growth requires audience growth, or a greater share of audience time. And in 2018, that may be hard to come by. Of all the cloud czars, Facebook’s results look the most like those of a pure media company.
This reality has yet to hit investors. The stock is up 33% in the last year, 5% so far in 2018, with investors looking backward at 48% year-over-year revenue growth and operating margins of 50%.
The problem is that when you buy Facebook stock, you’re buying it for tomorrow, not yesterday.
Pulling the Plug
Facebook’s North-American user base fell slightly during the fourth quarter, the first such decline on record. The good news is that revenue per user continued to rise, to $26.75 per user, up 35% YOY, and there is room to run in other markets.
Facebook executives deny this is a trend, and for now, Instagram is picking up the slack. But there are a growing number of stories like this one, urging that users get off Facebook because it tracks them around the Web (not just on the site), conducts behavioral experiments on them without permission, and generally has questionable privacy practices.
The near-term reduction in engagement seems to be accelerating, with Nielsen figures indicating time spent on the platform per person may be down as much as 24%.
Investors are also ignoring CEO Mark Zuckerberg’s own promise, made while tweaking its news feed in January, to reduce public posts in favor of private ones. Zuckerberg stated, “I expect the time people spend on Facebook and some measures of engagement will go down.”
This is not just a U.S. phenomenon. Sri Lanka recently banned Facebook, including its messaging services, blaming it for encouraging sectarian violence against Muslims.
A new German law requires that hate speech be removed within 24 hours. Facebook admits it has 12,000 people monitoring content in Germany alone, out of 14,000 globally. The Europeans say it still needs to do more to fight the “fake news” problem.
Can Content Fill the Gap?
The main Facebook response to these audience declines has been to get into the content rights business.
Facebook has reached licensing deals with all three major record labels to allow their work on user-created videos and pay royalties on them. Its streaming service is buying rights to a major league baseball game each week, 25 in all, adding this to existing deals in other sports.
In doing this, Facebook faces a bidding war with other social sites, like Twitter Inc (NYSE:TWTR) and Amazon.com, Inc. (NASDAQ:AMZN). Sports leagues that are seeing their TV and cable rights fees topping out now see social platforms as a major growth area.
The Bottom Line for Facebook Stock
Facebook stock is being valued based on the assumption it can continue growing, both the top and bottom line. The assumptions, on the surface, seem reasonable, with Facebook opening for trade Mar. 12 at just 30 times earnings, about the same price-to-earnings ratio as Microsoft Corporation (NASDAQ:MSFT), whose revenues are growing in the single digits.
But if growth trends reverse, or even slow, the impact on Facebook stock is going to be enormous. It looks like a perfect stock, but it’s priced to perfection and may be facing a perfect storm.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in MSFT and AMZN.