Facebook is flying too high again
Record profit can’t erase its many challenges
Facebook’s solid fourth-quarter results may have assuaged investors’ fears, but Wall Street’s newfound enthusiasm for the social network seems to ignore the fact that many significant challenges lie ahead.
After two disappointing quarters, Facebook managed to report continued user growth and a nearly 30% jump in advertising revenue for the December quarter. Analysts were effusive, with at least 20 boosting their price targets on the stock. That helped Facebook’s share price surge more than 10% on Thursday—the best single-day gain in three years.
But Facebook is also in the early stages of its race to match the rapidly evolving preferenc- es of its mammoth user base. In doing so, the company is reportedly working to move ads from its public newsfeeds to more intimate forums like Stories, video and messaging. Still, of the 7 million active advertisers across Facebook’s services, less than 20% are currently using Stories to advertise, the company said.
Facebook admits that this shift to newer platforms has contributed to its recent sales growth deceleration. The company’s challenge will be to not only increase revenue in places ads are already being offered, such as on Instagram, but also to transform platforms that traditionally have been ad-free, such as WhatsApp.
Surprisingly, half of adults surveyed last year by internet pri- vacy company DuckDuckGo weren’t aware that Facebook owns WhatsApp.
Facebook spent $22 billion in 2014 to acquire the messaging platform, along with the names and phone numbers of its user base.
People say they like WhatsApp because it is private, according to the Reuters Institute’s 2018 Digital News Report. Disabusing them of that notion with targeted ads could drive some WhatsApp users to defect.
Facebook said its average price per ad decreased last quarter by 2%, though impressions across its services grew significantly. Pivotal Research Group’s Brian Wieser says the majority of advertisers have budgets that are fixed in terms of dollars but fluid in terms of platforms used within the Facebook family.
They may decide to allocate a larger percentage of their dollars to higher-growth channels, for example, but the overall dollars spent will likely remain the same. So even as Facebook works to increase monetization across its new channels, it isn’t clear that overall ad revenue will increase, he said.
Facebook’s fourth-quarter results were a step in the right direction, so some recovery for a stock that had lost more than 30% of its value during a wave of scandals over the last six months is unsurprising. But Facebook still has many business challenges. That could make this relief rally difficult to sustain.