Facebook’s (NASDAQ:FB) fourth-quarter results showed that the company has strong, near-term, positive catalysts. However, the company is also facing several important negative trends that will weigh on FB stock for a long time.
Facebook’s ad impressions, ad revenue, average revenue per user (ARPU) and monetization trends meaningfully improved in Q4. Its ad impressions surged 31% year-over-year,and its ad revenue jumped 25% YoY. Also, the ARPU of the Facebook website jumped to $8.52 versus $7.37 during the same period a year earlier. Collectively, the company’s overall revenue increased about 25% quarter-over-quarter.
It appears that the increased monetization of the Instagram website and the Stories feature of the Facebook website, long anticipated by bulls, finally had a strong impact on the company’s results. On its Q4 earnings conference call, the company reported that, “impression growth was driven primarily by Facebook News Feed, Instagram Stories and Instagram Feed.” It noted that 4 million marketers bought ads on Stories, versus 2 million during the same period last year.
However, unfortunately for Facebook and the owners of its shares, the good times aren’t going to continue.
Google’s Revenge and High Costs
In a move that seemed to be completed to undermine Facebook, Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) Google unit — which competes with Facebook for digital ads — earlier this month made it harder for advertisers to target consumers based on their web surfing history.
Specifically, Google made it more difficult for other websites, including Facebook, to trace the surfing history of consumers through cookies. Given this change, Facebook ads will become much less valuable to advertisers since it will be harder to target the users on Facebook who are most likely to buy their offerings. In fact, Pivotal Research analyst Michael Levine cut his rating on FB stock to “sell” from “hold.” He also lowered his price target on the shares from $215 to $180.
Facebook itself indicated that Google’s change would have a meaningful impact on its business. The company’s CFO, David Wehner, said that its revenue would “decelerate by a low-to-mid single digit percentage point” in Q1, due to “the increasing impact from global privacy regulation and other ad targeting-related headwinds.”
Personally, I think that “other ad targeting-related headwinds” is a different way of saying “Google’s ad-targeting changes.”
Other Negative Catalysts for FB Stock
As Wehner indicated, tougher privacy regulations will also hurt Facebook’s ability to sell targeted ads. The company didn’t identify the need to improve the security and privacy of its websites as a key reason for the huge growth of its expenses , as they jumped 34% YoY in Q4. But in the past, Facebook has said that its security and privacy improvements have been very expensive.
That said, those expenditures probably grew in Q4 and will continue to surge going forward.
Furthermore, the company’s legal expenses are jumping as Facebook becomes more of a target for lawsuits by individuals, companies and governments. Wehner reported that its general and administrative expenses had soared 87% YoY, “largely driven by higher legal fees and settlements.”
Finally, increased regulation may hurt the company going forward. The EU and leading American politicians of both parties are looking into tightening the reins on Facebook, and the company is the target of probes on both sides of the Atlantic.
Despite all the negatives, Facebook does have some positive catalysts. The company’s increased monetization of Instagram and Stories are likely to continue and may even intensify going forward. It tested a digital payments platform on WhatsApp with 1 million users in 2018, and it expects to make “a lot of progress here in the next six months,” CEO Mark Zuckerberg said. It’s also still trying to push users to buy goods via its apps, and it continues to develop augment reality (AR) and virtual reality (VR) systems.
However, when it comes to payments and e-commerce, the company definitely lacks first-mover advantage. And, it may be awhile until its AR and VR offerings move the needle for its financial results and shares.
The Bottom Line on FB Stock
Google’s new limits on cookie tracing look poised to greatly limit Facebook’s top-line growth. Also, Facebook’s expenses are likely to continue to soar.
Meanwhile, its ability to develop e-commerce, AR/VR or digital payments offerings that will meaningfully boost its financial results is questionable. Overall, the company is likely to be able to continue successfully increasing its monetization of Stories and Instagram.
But given Facebook’s many challenges, FB stock is unlikely to outperform the market going forward.
As of this writing, Larry Ramer did not own shares of any of the aforementioned companies. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.