Categories Analysis, Technology

Facebook (FB) is getting a lot of hate these days, how is that going to turn out?

User engagement is expected to go down in the future as the restrictions are eased

Facebook Inc. (NASDAQ: FB) is in the eye of a storm, yet again. The social media giant has found itself in the midst of several controversies and criticisms before, and this time too, the company continues to defend itself against the backlash it is facing. Let’s take a look at what impact this has had, or is likely to have on the company’s performance.

Controversies

Facebook has faced several brickbats on the issue of privacy and the handling of user data. It has been criticised on its failure to weed out hate speech and offensive posts on its platform and has also been accused of censoring conservative posts.

The latest controversy to hit Facebook is the advertisement boycott wherein several major companies decided to withdraw from advertising on the social media site. These include Ford (NYSE: F), Starbucks (NASDAQ: SBUX), Coca-Cola (NYSE: KO), Pfizer (NYSE: PFE), Target (NYSE: TGT), and Levi Strauss (NYSE: LEVI), to name a few. But most of these companies said they are pausing their advertisements on all social media platforms and did not pinpoint Facebook in particular.

Facebook reportedly met with civil rights groups but the meeting was not successful. This once again puts the company in an unflattering position and puts its major source of revenue at risk.

Advertising

Facebook derives the majority of its revenue from advertising. In fiscal year 2019, advertising revenues grew 27% year-over-year, driven by a 33% increase in the number of ads delivered. The increase in the ads delivered was driven by an increase in the number and frequency of ads displayed on the company’s platforms as well as growth in users and engagement.

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Looking at the quarterly trend over the past two years, the pattern is similar. Advertising makes up most of Facebook’s revenue and it has increased consistently over this period. Advertising revenue has grown 76% in the past two years to reach $20.7 billion in Q4 2019.

Facebook quarterly ad revenue trend

In the first quarter of 2020, Facebook reported a 17% year-over-year growth in advertising revenue. Ad revenues amounted to $17.4 billion while total revenues were $17.7 billion.

The company saw a significant reduction in demand for advertising and a decline in the pricing of ads over the last three weeks of the first quarter amid the COVID-19 pandemic. After the steep decline in March, ad revenues began to stabilize in early April and maintained a flat trend versus the year-ago period. The April trend reflected weakness across all user geographies due to the lockdown.

Market experts have predicted that the digital advertising market will see weakness over the coming months as advertisers are likely to reduce their marketing spend. According to a report by eMarketer, lower ad prices are likely to persist in Q2 2020 and beyond. The report had predicted social ad budgets to decline at an average of 28% between March and June.

Even as large companies cut down on their social media advertising, some experts believe that Facebook may not see a huge impact as it has several smaller firms that rely heavily on its platform for advertising. With the COVID-19 impact and the ad boycott, it remains to be seen how Facebook’s ad revenues have been affected in the second quarter.

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User base

Looking at the user metrics over the past two years, Facebook’s daily active users (DAUs) have increased consistently on both a sequential and year-over-year basis. The monthly active users (MAUs) also display a similar trend.

Facebook daily active users quarterly trend by region

However, looking at the user base by region, it can be noted that the user growth has remained somewhat stagnant on a sequential basis in the US & Canada and Europe regions. Facebook has received severe backlash in these regions over its handling of privacy, user data and toxic content. It has been speculated that Facebook’s censoring of conservative speech has led many users to switch to rival platforms.

During one of its previous earnings announcements, Facebook’s CEO Mark Zuckerberg had hinted at market saturation in the US, which can also be attributed to the slow user growth.

Facebook monthly active users quarterly trend by region

In the Asia-Pacific and Rest of World regions, users have increased at a relatively higher rate, particularly in places like India, where there is still potential for growth. In the first quarter of 2020, DAUs and MAUs increased 11% and 10% year-over-year, and 4.8% and 4.4% on a sequential basis, respectively.

This increase was driven by higher engagement as more people spent time on social media while staying home due to the pandemic. This is expected to go down in the future as the restrictions are eased. But overall, Facebook is still seeing user growth and engagement despite its many controversies, and this is likely to continue as the company brings out new features and continues to invest in new streams of revenue.  

Stock

Facebook’s shares have gained 18% since the beginning of this year and have jumped 38% over the past three months. Amid Facebook’s boycott struggles, its rivals Twitter (NYSE: TWTR) and Snap (NYSE: SNAP) saw some gains. Twitter’s stock has gained 9% since the beginning of this year and 26% over the past three months. Snap, meanwhile, has jumped 54% since the beginning of the year and 85% over the past three months. However, all three stocks were trading in red territory during afternoon hours on Friday.

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Facebook is scheduled to report its second quarter 2020 earnings results on Wednesday, July 29, after market close. Click here for earnings updates.

Click here to read the transcript of Facebook Q1 2020 earnings conference call

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