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Ouch! Facebook

Posted on Friday, Jul 27th 2018

Facebook’s (Nasdaq: FB) recently announced second quarter results are making the market wonder if the company has finally lost its charm. The company has been dealing with controversy around fake news and growing privacy concerns for a while now. Recent results suggest that those issues may be finally taking a toll on its usage metrics.

Facebook’s Financials

Facebook’s Q2 revenues grew 42% over the year to $13.23 billion, missing the market’s estimates of $13.43 billion. EPS of $1.73 was also short of the Street’s forecast of $1.74 for the quarter.

By segment, advertising revenues grew 42% over the year to $13 billion. Revenues from payments and other fees grew 23% to $193 million.

Besides missing financial metrics, the company also delivered very weak operating metrics, delivering the slowest-ever user growth rate. Monthly user count grew 1.54% compared with 3.14% a quarter ago. Daily active users grew at 1.44% compared to 3.42% last quarter. This was the first ever quarter that Facebook saw user base shrink in Europe and go flat in the US and Canada. European user base slipped from 377 million to 376 million, suggesting the impact of Europe’s stringent GDPR privacy law requirements. US & Canada subscriber base was flat at 239 million for the quarter. Stalling growth rates in these markets could spell a bigger problem for the company as they are its biggest revenue generating markets.

And, things aren’t expected to improve soon. Facebook announced that its total revenue-growth rate will continue to decelerate in the second half of 2018. It also expects revenue-growth rates to decline by high-single-digit percentages from prior quarters sequentially in both Q3 and Q4, while expenses are expected to grow 50%-60% over the year as it invests in security and content.

One of the reasons for the shrinking usage metrics has been concerns on the addiction that Facebook drives. A recent BBC documentary revealed how social media companies including Facebook and Twitter were building their platforms to make them addictive. Former Facebook executives have mentioned how the company is “exploiting a vulnerability in human psychology” by designing features such as the Like button, and the infinite scroll that make users want to keep spending time on Facebook.

Facebook Image Change

Facebook has been dealinexploiting a vulnerability in human psychologyg with several controversies involving its hand in the US elections, fake news and the data security concerns. The company is hoping to address these through a concerted effort to improve its image. It is adopting the “Time Well Spent” philosophy by removing click-bait news and meaningless viral videos that generate internet content consumption, but are proven to be unhealthy for the users. It is driving user engagement through features such as Watch Party that allow users to actively interact with each other.

To make users feel more comfortable about its data security concerns, it announced features that enforce stringent rules on APIs to avoid more Cambridge Analytica like issues. It has extended its fact-checking partnerships to 17 countries to control the growing epidemic of fake news. It has also implemented a new verification system for political advertising to control fallouts like the US presidential elections.

But the market is still concerned if its efforts are strong enough. Facebook is not ending fake news, but it is just downranking them so that they don’t appear on top of the user’s news feed. Also, currently it takes Facebook nearly 3 days to identify fake news and downgrade it. Analysts worry that is not fast enough as the news articles have already attracted majority of their audience by then.

Facebook still has other properties that it can monetize. WhatsApp has more than 1.5 billion monthly active users and does not show ads or charge a subscription. Similarly, Instagram and Facebook Messenger, both with more than 1 billion monthly active users have not been monetized fully. But Facebook would most likely spend more time on damage control before it changes gears on creating more ad-focused revenue streams.

Its stock is trading at $176.26 with a market capitalization of $503.6 billion. It fell over 20% after result announcement. It had touched a record high of $218.62 in anticipation of the results. The stock was trading at a 52-week low of $149.02 in April this year.

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