Facebook Inc (FB) News Feed Change Is a Necessary Evil
Facebook Inc (Nasdaq: FB) stock was getting hammered on Friday, selling off by more than 4 percent after CEO Mark Zuckerberg announced changes to the Facebook News Feed. Despite concerns about the company's advertising cash cow, Friday's sell-off may be an overreaction.
Zuckerberg says the revamped News Feed will prioritize "meaningful social reactions." Zuckerberg also warns that Facebook users may spend less time on the platform as a result of the changes.
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"But I also expect the time you do spend on Facebook will be more valuable," he says. "And if we do the right thing, I believe that will be good for our community and our business over the long term, too."
Earlier this month, Zuckerberg made a pledge to "fix" Facebook in 2018 by reducing abuse and policing Facebook's policies.
Zuckerberg says Facebook users will soon notice fewer News Feed posts from publishers and advertisers and more content from friends. Of course, less advertising is not what investors are looking for from Facebook, which is why investors were spooked on Friday morning.
In the most recent quarter, Facebook reported $10.1 billion in ad revenue, up 49 percent from a year ago. Advertising revenue makes up more than 98 percent of Facebook's total revenue.
Despite the sell-off, GBH Insights head of technology research Daniel Ives says Facebook's News Feed tweak was the right long-term move for the company.
"While the News Feed changes just announced could be worrisome in terms of an ad growth hiccup, we believe this overhaul was the right move for longer-term user engagement and driving 'meaningful content,' which remains the core ingredient in Facebook's recipe for success for the coming years," Ives says.
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Ives says better content is a key part of Facebook maintaining and growing its global active user base of more than 2 billion people. That massive, engaged user base is what advertisers care about the most. GBH projects Facebook's Instagram platform will also reach 1 billion monthly active users by mid-2018.
"We view [Instagram] as an underappreciated asset by the Street that could be a major growth catalyst for Facebook over the next 12 to 18 months on the advertising front," Ives says.
GBH has a "highly attractive" rating and $225 price target for FB stock.
Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.
