Investors, observers like changes in Facebook News Feed
Facebook Inc.’s strong fourthquarter results included impressive 44-per-cent revenue growth, a roughly 500-basis-point annual operating margin expansion, and a 14-per-cent year-over-year improvement in monthly average users to 2.13 billion. But investors are likely more interested in the social media giant’s recently announced changes to its News Feed.
Specifically, the market wants to know how monetization will be affected, and after a brief sell-off Wednesday afternoon, investors resumed the recent buying trend Thursday to send Facebook shares to a fresh high above US$190.
Facebook stated that the impact is not clearly negative, as time spent viewing more posts from friends and family, as opposed to longer articles from publishers, may end up creating more monetization opportunities.
“We feared going in that Facebook would use the News Feed changes as a way to talk down revenue more materially, but management stuck with its tone of continued (steady) deceleration, which we think is a positive,” said Doug Anmuth, an internet analyst at J.P. Morgan.
The company expressed its confidence in modest impression growth for 2018, even when the News Feed impact is incorporated. Despite not discussing ad load specifics, or the impact from users spending five-per-cent less time on the social network in Q4, Facebook noted that the changes will impact passive video the most, where monetization rates are lower than the rest of the News Feed.
“We believe the algorithm change will not just be ‘not negative’ (as management noted), but positive for revenue as brands buy back reach via paid ads,” said Daniel Salmon, an analyst at BMO Capital Markets.
But he said the outlook for margins is cloudy, due partly to the high costs related to Premium Video such as original programming.
Facebook has seen some early success with mid-roll ads, as more than 70 per cent of ads up to 15 seconds were watched in their entirely. However, Salmon pointed out that it still has a long way to go to attract viewers to its Watch video hub, and then monetizing those views.
“With stricter video monetization policies announced during the quarter, this will only take more time,” the analyst said.
Despite monthly average user growth staying solidly in the midteens, this and the daily user figure fell short of expectations. MAU growth was flat for the first time ever in Canada and the U.S., a sign of maturation in those markets.
While ad impression growth decelerated to four per cent from 10 per cent in the previous quarter, Facebook posted a 43-per-cent year-over-year acceleration in pricing growth. “This is consistent with recent trends, and we believe recent and ongoing News Feed changes will continue to impact these metrics,” said Canaccord Genuity analyst Michael Graham.
He highlighted how videos will be displayed that prioritize meaningfulness over popularity.
“Taken together with slower ad load, we believe these changes will strengthen the user experience and lead to more engaged users, ultimately driving the long-term advertising business,” Graham added.
Growth in overall advertising revenue continues to be the most important factor for Facebook, and at 44 per cent annually (ex-FX) in Q4, it continues to impress, particularly given the company’s US$41 billion in 2017 revenue and 60 per cent-plus EBITDA margins.
RBC Capital Markets analyst Mark Mahaney noted Google is the only other platform that’s been able to achieve this, and that was in 2007.
He also said that with more than two billion active users (and growing), Facebook collects a large amount of data that is unique and valuable for ad and content targeting. “We continue to believe Facebook’s focus on ads quality is the right strategy ...” he said.