Although it’s the undisputed king in terms of footprint in the social media space, Facebook (NASDAQ:FB) has incurred some questions. With various controversies and privacy concerns impacting the brand, FB stock shouldn’t be considered automatic. As well, shifting user behaviors beg the question, has Facebook lost its magic touch?
On the surface, it seems a ridiculous proposition. In the social media behemoth’s fourth quarter of 2019 earnings results, it checked off all the major metrics convincingly. For instance, against an earnings-per-share consensus target of $2.53, Facebook delivered $2.56. Against a revenue estimate of $20.89 billion, the company rang up $21.08 billion.
The user engagement numbers were encouraging as well. Matching monthly active user (MAU) estimates of 2.5 billion, Facebook slightly exceeded the forecast of daily active user count by 10 million to 1.66 billion. Furthermore, average revenue per user was $8.52, boxing out the $8.38 consensus target.
All these metrics augured well for FB stock. However, plunged the day after the earnings release. Critics noted that Q4 2019 represented the “fourth straight quarter that the company delivered sub-30% growth.” That combined with regulatory clouds and Facebook’s various privacy scandals may have resulted in substantial brand damage.
In an email conversation with Maksym Babych, CEO of mobile development and IT consulting firm SpdLoad, he informed me that the technical posture of FB stock does not inspire confidence. Babych further argues that this is for a reason.
First, Facebook has many complaints about its “outdated interface,” especially for 2020. Second, and more importantly, the explosion in popularity of video-sharing social network TikTok presents a headwind for FB stock. Should stakeholders be concerned?
Reassessing TikTok’s Impact on FB Stock
Personally, I found Babych’s insights intriguing for two reasons: one, I’ve generally been bullish on FB stock and two, I dismissed TikTok as “just noise” last October.
I try my best to practice what I preach. And one of the concepts I’ve discussed in the past is to not get emotionally involved with your investments. A clear bullish thesis can easily turn bearish on a dime. So, I decided to look into the counterargument against Facebook.
As Babych pointed out, TikTok has skyrocketed in popularity. From January 2018 through December 2019, the video-sharing platform’s global MAUs (iOS users) increased an average of over 68% year-over-year. Currently, TikTok has 34.3 million users as of December of last year.
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Granted, this is a rounding error when you look at Facebook’s nominal base. However, despite TikTok’s resonance, especially with Generation Z, it has little recognition in the U.S. But that could very well be a market penetration opportunity given TikTok’s expanding presence.
The bigger argument against FB stock is that American users are starting to use the underlying platform less. Interestingly, this loss of interest is for a seemingly mundane reason: people don’t like the social networks’ vibe anymore.
According to a survey by Edison Research, the number one reason U.S. adults are using Facebook less is that they “don’t like rants” or too personal comments. In second and third place are “too much negativity” and “tired of political posts,” respectively. With a contentious election season underway, this might spell further usage declines for Facebook.
Thus, it’s not so much about TikTok posing an existential threat to FB stock. Rather, the video-sharing network is everything that Facebook is not: it’s lighthearted, entertaining and appeals to the emerging youth generation.
Time to Unfriend Facebook?
So, should you be worried about FB stock? While I acknowledge the nearer-term risks to the share price, I remain long-term bullish.
Primarily, Facebook is demographically balanced. Sure, it’s not going to win over Gen Z the way TikTok or rival Snap (NYSE:SNAP) has. It doesn’t need to. As people mature, their priorities shift. With Facebook, you can perform myriad functions, ranging from connecting with people to advertising your business. That versatility and credibility is missing with youth-centric social networks.
Further, Facebook is more than just its namesake platform. With Instagram under its corporate belt, it has greater reach with the youth market. As well, Instagram – combined with Facebook — facilitates the social media influencer phenomenon. This is already translating into a huge business with significant merchandising implications.
Ultimately, the noise that TikTok is making has certainly gotten louder. As well, the many legal issues that cloud Facebook isn’t exactly encouraging. But compared to the company’s robust positives, it’s still in my opinion just noise.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
