The (roughly) 20% decline in Facebook is now the talk of the town after its plunge struck fear into investors and sparked widespread panic among investors. Facebook has been a rather predictable business for the past decade and has grown its user base exponentially and also reaped in revenue from advertisements. Where will Facebook head?
Long term trends still pointing upwards:
- Facebook's fundamentals are still very good, despite the privacy leak saga
- High free cash flow
- Quarterly revenue growth was 49% (year on year)
- Quarterly earnings growth was 62.8% (year on year)
- Still a very profitable business with high profit margin at 40%
- Increasing revenue from mobile ads over the years (as shown below). Trend likely to continue.
- High daily user rate as daily users in US and Canada still stand at a high 185 million.
Long Term unfavourable factors:
- User base growth and usage appears to have finally hit saturation and slowed down, meaning it will not be able to replicate and sustain its past growth rate.
- Not withstanding sluggish user growth, research has shown that Facebook users are predominantly middle aged women and young users don't favour it instead using platforms like Snapchat and twitter more. Facebook's purchase of Instagram has retained some of these young users.
- New laws on privacy in Europe look to hit Facebook and caused user decline.
- Facebook's reaction to move 1.5bn users to fall under US law instead will have people question its commitment to privacy.
- Facebook's ex chief information security officer Alex Stamos left on a sour note amidst disagreements indicating all might not be well behind the scenes and there are conflict about where Facebook should be headed.
- Facebook's changing algorithms have also hurt digital businesses that it derive part of it's revenue from. In a nutshell, Facebook is shifting focus on user content and this put a hole in digital marketers' traffic which would likely translate into lesser revenue as well.
- Long term plans to move into China market hit a snag after the Chinese government withdrew Facebook's approval for an innovation hub.
- Strong downward momentum on Stock Chart, which is likely to continue for a while.
- Mark Zuckerberg warns of slowed growth going forward (Not the first time he did it, perhaps to lower public expectations)
- Mark Zuckerberg dumped alot of Facebook shares for Q2 of 2018, and Insiders have also dumped Facebook shares. Did they know the stock was going to drop?
- Expected increase in spending on privacy and security (will erode earnings and revenue)
- Public still reeling from the privacy leak scandal.
- Facebook and Mark Zuckerburg sued after the plunge.
In summary, Facebook still continues to be a very profitable business, but short term fear and long term permanent changes to its user trends and algorithms may have long lasting effect on the business which makes its outlook very unpredictable going forward. It remains to be seen how these changes would positively or negatively impact the business as a whole. Results and data over the next few quarters will shed light on the impact of these changes.
Till next time,
K.C.
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