It’s been a tumultuous year so far for Facebook – algorithm changes, scandal after scandal, and harsher critique of social media at large. Kevin Hua looks at what it all means for the company’s share price and future growth.
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Facebook announced major newsfeed algorithm changes back in January. The newsfeed will favour posts from friends and family over brands and publishers, in an attempt to address its association with ‘fake news’, as well as the psychological effects of social media.
Kevin chats to Chris Hall from Arrow Securities about what the updates mean for Facebook shareholders.
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Chris: So, we’re looking at it from an investment perspective. What do you take from this update in the news algorithm?
Kevin: I take it as a long-term positive for Facebook. I think in the short-term what they’ll recognize is: firstly, with the news feed being proliferating people’s user feed, that people were less engaged with their Facebook profile.
And this is a means to sort of increase engagement over long-term. Now, they will lose some short-term engagement as people sort of get distracted and move off Facebook as a news source.
But what they’re hoping, which I think they will achieve, is that they will increase long-term personal engagement again, which is how Facebook actually started in the first place and became successful.
Chris: Okay. So, we all picked it up because we love the user experience, ads were introduced, and then news feeds float in, but we’re coming back to the initial reason we picked it up which was user experience. So, you think that that improved engagement is actually going to be a long-term win?
Kevin: Yeah, I do. You know, like all these things, there’s always a balance that a company like Facebook has to find between, taking care of its user base and also generating sufficient revenue.
And how I think they’ll do that is that real estate on the news feed will be more and more valuable. So, Facebook will have to charge the advertisers, the news sources more to use that feed.
So, they may not generate as much revenue in terms of actual impressions or news articles or ads, but they’ll be able to charge more and hopefully increase average revenue per user over time.
Chris: Finally, we see that a lot of the distribution channels, the old ones before Facebook, have then come to the point of relying almost entirely upon Facebook. Seeing this change in the media and how they distribute it, is it possible that Facebook is disrupting or upsetting their business partners to an extent that it will have a material impact on their relationships?
Kevin: That’s a great question. You know, at the fringes, that may happen. But I think if you’re a large account in particular, or certainly one of their more prolific users, you don’t have much choice.
If you want to advertise on social media, Facebook and its affiliated companies such as Instagram, Messenger, and WhatsApp are the ways to go. So, I don’t think it will really impact that relationship over the long term.
We’re going to see a little bit of short-term movement potentially, but I think in the long-term, it will help the consumer or the user, and it will help Facebook as well.
Chris: Are you selling, buying or holding?
Kevin: I’m buying Facebook at these levels. Obviously, it’s come off about 15% since news of the Cambridge Analytica scandal came out, and I think there will be some short-term volatility.
But look, at current levels, Facebook is trading on 18x with about 21% EPS (earnings-per-share) growth over the next three years. So, I remain reasonably bullish about the stock.
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