Facebook (NASDAQ: FB) CEO Mark Zuckerberg is making good on his New Year's promise to fix Facebook. In response to a question during the company's third-quarter conference call, Zuckerberg noted that "connecting with friends and family and having those meaningful interactions is more important than just consuming content." This month, in a lengthy post on his website, Zuckerberg announced that Facebook's timeline feed algorithms would be updated to expose users to more posts from friends and family.
Who couldn't get behind a company taking strong steps to improve the user experience? Wall Street, that's who. In response to Zuckerberg's post, shares sold off by as much as 4.5%. Wall Street analysts are voicing concerns about the impacts to revenue and profit in the short term. However, long-term investors should take these concerns with a grain of salt.
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Listening to Wall Street on Facebook has been dangerous for your portfolio
Of course, long-term Facebook observers can't help but realize Wall Street has often been wrong about the social-media site. Before going public, Facebook faced various bearish theses from analysts, most notably that the company could not thrive in an increasingly mobile environment.
Analysts were particularly harsh about the CEO's decision to pay $1 billion for a company with no revenue, Instagram, shortly before the initial public offering. A flawed rollout of the IPO, through no fault of Facebook, compounded Wall Street's ire and dragged the company down to $19 per share.
Of course, we now know Wall Street's concerns were overstated and were correctible. First of all, the company now produces approximately 90% of its advertising revenue from mobile. Second, the Instagram acquisition is now considered a steal, as it provides substantive contributions to revenue and is growing at a faster clip than Facebook's eponymous site; according to marketing analytics company eMarketer, Instagram will gross $10 billion in revenue annually by 2019.
Long-term, this is a smart move for Facebook
Will Facebook's changes to its feed algorithm decrease ad load and lead to less revenue and/or profit in the short term? Perhaps. However, that wasn't the case last quarter, as CFO David Wehner noted that lower ad load had no significant impact on growth. Facebook continues to have significant reach with approximately 2.1 billion users, and it has tremendous data on each user, so the company can raise advertising rates if it needs to.
It's Facebook's massive user base of 2.1 billion people liking, interacting, and posting that gives it power with advertisers, so it's a wise move to keep them happy and engaged. Much is made of Facebook's monthly active user and daily active user figures, but growth in those figures will eventually hit their outer bounds. More meaningful is the total time spent on the site, which is a product of number of users and time spent per user. If Facebook wants to increase this figure, its best long-term plan is to work hard to continue to improve the user experience.
For long-term investors, your bull thesis is still intact. Use temporary weakness to add more shares, and make Wall Street's myopia work for you.
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