This last week Facebook lost more value in a single day ($119B) than 457 out of the 500 companies listed in the NASDAQ composite index. While this may have scared some investors off, this should not have come as a surprise.
Below, we’ll dive in as to what is going on with Facebook, some analysis, and my current predictions for the social company as well.
Why did this happen and what does the future look like for Facebook?
Frankly, we (as in EveryoneSocial and other 3rd party platforms that leverage the Facebook platform) should have seen it coming.
In recent weeks Facebook has made some very big changes to their APIs. Many of those APIs, which have existed for years (we’ve been an integration partner for over 8 years) is going away and others are being further restricted in terms of their functionality.
The message was simple: in a post-Cambridge Analytica world, the days of a 3rd party platform being able to pull almost any data out of Facebook are gone (still find it funny that this was something that they thought was OK for as long as they did).
While all this is rather technical, it’s connected to a broader theme that goes back to Zuckerberg’s announcement a few months back that Facebook would be reducing the amount of advertiser and publisher content in people’s’ timelines and surfacing more user-generated content.
Of course, they have a lot of work to get to that place and tightening up their APIs and developer policies is one of a number of steps they’re likely to take; it’s just one of the biggest and most obvious, which is probably why they decided to hit it first.
So why did Facebook their stock drop by ~20%?
Facebook’s stock drop did not have anything to do with their API policy changes, it had to do with the fact that they reported slower user growth and that the forward guidance they gave (what they think the next year or two looks like) predicted a continued decline in user and revenue growth.
Mind you, revenue for this last quarter was still up over 40% from the year before (that’s massive considering how big of a company they are), but investors have become sensitized, perhaps overly so (thanks largely to the struggles of Twitter and Snapchat) to user metrics like newly registered users and daily active users.
I think we can all agree that this slowdown in growth had to happen at some point; they simply could not continue to grow at their historic rates forever. The Facebook team recognizes that they need to get their house in order, that they need to rebalance content from people vs corporations, and they’re getting ahead of the problem.
Of course, this is going to cause some pain, but kudos to them for being willing to actually get on top of it; the general tendency for corporations is to ignore or at a minimum, not communicate these types of issues until they’re in the thick of them/it’s too late.
What does the future look like for Facebook?
Clearly, their aim is to clean up a lot of the garbage and misuse of their platform and bring the focus back on the users. But of course, when you have well over 2 billion active users that’s no small feat and is likely going to take them at least a few quarters (perhaps a few years).
It’s going to be really hard work and there isn’t a clear blueprint for how to do it; these are problems that all the major social networks face, Facebook just happens to be the largest and most successful. It will certainly be a test of their leadership and the company as a whole to navigate these uncharted waters.
I think one of the other things we’re going to see Facebook continue to pursue is a diversification of its product mix. Google is a great corollary. Search was obviously where they started, but they now have eight product lines that each generates over $1B in revenue per year (and they wouldn’t be a $800B company without them).
While Facebook’s acquisition of Instagram was a masterstroke, they’re going to need to find other categories to expand into. They can probably continue to grow the core Facebook user base, but and unless China decides to open up their market to them (seems unlikely), it’s going to happen at an ever diminishing rate.
In summary, the pullback on Facebook’s stock was sharp and (as is often the case with the stock market; remember when Linkedin’s stock dropped 44% when they missed their numbers?) not really connected to reality, but the fact remains that Facebook has many challenges ahead of them, some of them I would argue are existential.
Facebook isn’t going away anytime soon and they have a very smart and capable founder and team and plenty of resources, but the salad days of exponential growth of the core platform (and a data free-for-all for 3rd party platforms and advertisers) is over.
Only time will tell if they’re able to pull themselves out of what will likely be slow but extended descent.