There’s no doubt about it. Since late July, it’s been tough for Facebook (NASDAQ:FB). FB stock plunged 19% on Jul. 26 after posting a disappointing second quarter revenue figure and suggesting that user growth is slowing. A few days later, it looked like the stock was on the mend, but shares are back within sight of the low made on Jul. 26.
Another chance to buy? Maybe. But, there’s certainly no denying that stepping into FB stock here is like catching a falling knife. It’s possible, but plenty dangerous. Right or wrong, the bears may not be done with FB stock yet.
On the other hand, any investor who’s sworn off Facebook forever, believing its best days are behind it, may want to take a step back and look at the bigger picture.
More Than Just Advertising
The reality is Facebook’s user growth — and revenue growth for that matter — was going to slow sooner or later. And, it would have been surprising if Facebook didn’t hit that wall by its own hand.
Yes, the Cambridge Analytica scandal was embarrassing and damaging. For more than a few users, it was the proverbial last straw, even though the company has since overhauled everything.
If we’re being intellectually honest, though, the Cambridge Analytica gaffe was merely a symbolic representation of just how pervasive Facebook’s targeted-ad machine had become. There was always a reason Facebook was free and easy to share more and more of your personal information with. Now the company is being forced to pull those reins back a bit.
At this point, though, it just doesn’t matter.
The worrywarts are likely to be right, to be clear. Facebook’s high-growth era is in the rearview mirror. It needed to be able to build a stunningly detailed picture of each and every user to sell to advertisers. It doesn’t really need that anymore. It has what it needs.
That is, it has a “good enough” profile of each and every one of its roughly two billion users to not only use as a means of selling ads, but also as a means of selling a variety of other revenue-bearing services.
Case in point: Facebook is stepping up its push into the virtual reality market, introducing a lower-cost VR headset (the Oculus Go) in May.
Facebook is sticky, to be sure. And, VR is cool, even if there’s only a modest amount of virtual-reality content to enjoy thus far. Using Facebook as a means of selling VR hardware and media, however, is a bit clumsy and ineffective. Facebook is doing it anyway, because it can.
Seriously, It’s Not Just Ads
Oculus hardware isn’t the only non-advertising revenue Facebook is trying to generate, however. Facebook is now also waist-deep into video gaming.
It always has been, technically. At one point, most everyone who wanted to play Farmville, from Zynga (NASDAQ:ZNGA), went through Facebook to play it. That symbiotic relationship became too strained in 2012 to continue, though the social networking platform has always featured some sort of casual online gaming experience.
It’s not merely casual, browser-based or app-based games Facebook is pushing now, however. Facebook’s Gameroom offers something for serious, hardcore gamers. The gaming platform has also been built from the ground up to facilitate the collection of fees and revenue from players, and the distribution of revenue to game developers. Facebook keeps some of that cash for itself.
Almost needless to say, selling video games via Facebook is a relatively fluid process compared to selling virtual-reality content and VR goggles.
It’s not just virtual reality or gaming that are clearly not social networking-oriented sources of ad revenue for Facebook, though. In early August, Facebook took a small step toward becoming something of a de facto online bank by asking banks to work with it by sharing their shared customers’ data.
A year ago, Facebook waded deeper into television waters, earmarking as much as $1 billion to be spent on the original video content, which would be ad-based, but akin to traditional television and the in-stream commercials traditional cable TV service injects into a program every few minutes.
While those initiatives may not be getting a ton of traction yet, time may well change that.
If the premise rings a bell, it’s a page borrowed from the Amazon.com (NASDAQ:AMZN) playbook. Amazon’s aim from the beginning was to become a lifestyle company, playing a role in multiple aspects of a consumer’s life. Profitable monetization could come later.
It seems to be working for Amazon. It should work for Facebook, too.
Bottom Line for FB Stock
The point is, while FB stock was duly punished for a poor second quarter that led to concerns about its future, user growth isn’t as critical going forward as it has been for Facebook in the past.
Going forward, Facebook can extract more revenue from users by offering other things besides a mere chance to connect with friends or argue with people they don’t know. It’s becoming a lifestyle company, too, cultivating multiple ways to generate revenue — most of which involve anything but conventional ad sales.
None of this is to suggest FB stock will bounce anytime soon. It might, but there are never any guarantees. Investors have to see and believe the paradigm shift is underway to reframe how they judge Facebook, and most of them simply don’t see it yet.
But sooner or later, the market will realize Facebook is morphing into more than just a social media platform. As investors rethink how the company should be judged, that can only help FB stock.
Patience is required in the meantime.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
