There’s no denying Facebook Inc (NASDAQ:FB) is “the” name in social networking — not just for consumers, but for investors. Facebook stock is up 227% from its 2012 IPO price of $38 per share, and still going strong.
Revenue and earnings have moved in step with the advance of Facebook stock, too.
[ad#Google Adsense 336×280-IA]Last year’s top line of $17.9 billion is leaps and bound better than 2012’s revenue of $5.1 billion. And FB’s annual net income grew from $32 million to $3.67 billion for the same time frame.
It doesn’t get much better than that.
All the same, Facebook — like any other company in the world — isn’t infallible. Things can go wrong.
Even if Facebook continues to do exactly what it’s doing, paradigm shifts in technology and culture can create fiscal headwinds.
(Just ask companies that made dial-up modems or the outfits that operate department stores.)
In other words, nothing rests on investors’ pedestals forever. And Facebook stock is far from invincible.
While a wide array of factors could ultimately crimp the value of FB stock, some are more concerning than others. The biggest of the potential headaches are (in no certain order):
#1: A Killer Alternative Messaging App
Facebook was wise to acquire messaging apps WhatsApp and Instagram rather than continue competing with them. They not only brought a new technology into the Facebook fold, they brought millions of active users with them — users that advertisers want access to.
There could come a point in time, however, that a killer instant messaging app surfaces that everyone loves, and isn’t willing to sell to Facebook.
Yes, it matters.
Instagram and WhatsApp have been around for years, but Facebook has only turned the heat up on their monetization (along with Facebook’s native chat app) within the past several months. Nothing kills a platform the way commercializing it does, though. Should users be turned off by a few too many advertisements, it will become real clear real fast that the bulk of the organization’s recent revenue growth was highly dependent on mobile, which now drives 80% of Facebook’s revenue.
For the record, CFO Dave Wehner already warned that ad impression growth could slow in the coming year. Facebook simply has fewer new places to put them.
#2: An Overwhelming Amount of Uninteresting Information
Kudos to CEO Mark Zuckerberg for continuing to find a way to extract more revenue per user each quarter rather than less. But at some point, FB might cross the line between a tolerable amount of advertising (and other noise) and an overwhelming amount of information is crossed. At that point, users could start to lose interest in Facebook.
That reality might be closer than most investors realize.
Think back to what Facebook was when it was still a fledgling networking site back in 2008. It was charming, it afforded a chance to friends to connect with one another, and it allowed people to share ideas or information.
Now, Facebook has become a hub of information and ideas from hundreds if not thousands of “friends.” That’s a powerful opportunity, to be sure, but it also poses the risk that Facebook is becoming an intersection rather than a destination in itself.
A toll is already being taken. A recent study found that Facebook’s consumer satisfaction index had fallen 9% in the past year.
“Consumers have not fully accepted advertising as a necessary cost for online services they have come to expect as free,” American Consumer Satisfaction Index Chairman Claes Fornell said. “There is little companies can do to change that perception beyond making sure that those advertisements are relevant and non-disruptive.”
#3: Facebook Buys Twitter
To say Facebook has outperformed Twitter Inc (NYSE:TWTR) would be a massive understatement. It has trounced Twitter. Facebook boasts 1.7 billion active users, and the number is still growing. Twitter, on the other hand, is struggling to maintain a little more than 300 million regular users.
The reason has been discussed before: Facebook appeals to users’ vanities. Twitter doesn’t. Facebook allows for rants, selfies and diatribes. Twitter doesn’t. In other words, it’s not clear what Twitter is supposed to “be” or “do” just as a microblogging platform. Yet, CEO Jack Dorsey doesn’t want to make it much else besides that.
A new owner could take Twitter’s platform and integrate into a different kind of platform, though, making it part of something bigger rather than a standalone service that leaves most users wondering why they should care.
Granted, we’ve seen glimmers of these alternative possibilities. Twitter posts have been fed to and aired on live television shows, and some websites are now treating tweets as content. By and large, though, Twitter has not posed a threat to Facebook in this way.
But a larger suitor like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) could put Twitter on steroids and use the platform in revenue-bearing ways nobody has thought of yet.
Bottom Line for Facebook Stock
Don’t misread the message. This isn’t a prediction of what will happen. It’s an explanation of what could happen.
They’re ideas well worth mulling all the same, though, as with nearly four years of oversized gains and stunning growth, owners of Facebook stock have become a little spoiled to the company’s perpetual success. That’s a concern, because that’s all too often when things start to unravel.
As the saying goes, expect it when you least expect it.
— James Brumley
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Source: Investor Place
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.