Investors warm to Facebook’s News Feed changes

Algorithm tweak seen as ‘positive for revenue’

Facebook Inc.’ s strong fourth quarter results included impressive 44 per cent r e venue growth, a roughly 500- basis- point annual operating margin expansion, and a 14 per cent year- over- year i mprovement 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 on Wednesday afternoon, investors resumed the recent buying trend on 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 did point out 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.

However, he noted that the outlook for margins remains cloudy, due partly to the high costs associated with Premium Video such as original programming.

Facebook has e xperienced 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 the company still has a long way to go when it comes to attracting 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 remaining solidly in the mid- teens, 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 Michael Graham, an analyst at Canaccord Genuity.

He highlighted how videos will be displayed that prioritize meaningfulness over popularity.

“Taken t oge t her with slower ad load, we believe these changes will strengthen the user experience and lead to more engaged users, ultimately driving the longterm 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 centplus EBITDA margins.

Mark Mahaney, an analyst at RBC Capital Markets, noted that Google is the only other platform that’s been able to achieve this, and that occurred in 2007.

He also pointed out that with more than two billion active users (and growing in the teen percentage points), Facebook collects a large amount of data that is both unique and valuable for ad and content targeting.

“We continue to believe Facebook’s f ocus on ads quality is the right strategy, particularly given management’s previous commentary around ad loads being a less significant factor for growth starting in the second half of 2017,” Mahaney said. “Facebook still has many growth levers left to pull, not least of which is video advertising.”