Facebook Stock: News Feed Overhaul Tightens ‘Consumer Mousetrap’

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Facebook Inc (NASDAQ:FB) stock continued to slip in early trading on Tuesday in very heavy volumes right out of the gate following the Martin Luther King Jr. Day holiday on Monday. Before midday, about 14.6 million shares of Facebook stock had already changed hands, compared to the 100-day average daily volume of approximately 17.7 million shares.

Analyst views have been mixed, with one or two having dire warnings for investors about the Facebook News Feed overhaul, while most tried to do damage control by offering reassurances for investors. As the morning wore on, it seemed sentiment on Facebook stock shifted toward the positive. It seems that either the analyst reports began to support Facebook stock, or it fell to a level bulls felt offered an opportunity to expand their positions.

Facebook stock tumbles on News Feed changes

Investors started shedding Facebook stock last week as soon as company management warned that users might spend less time on the platform and that less public content might be shown as a result of the changes. From an investment standpoint, the concern is that Facebook’s ad revenue will take a hit, but I don’t see that happening. On the contrary, I would compare their warnings about the Facebook News Feed overhaul to the concern they once expressed repeatedly over ad load and how they couldn’t increase it any further.

Ultimately, their “warnings” didn’t have any impact on the company’s ability to rake in revenue, and I expect these News Feed changes that have rattled Facebook stock for now to have a similar effect. The social media firm wouldn’t make changes which could severely impact its revenue without having a way to adjust and come out at the very least no worse than before—if not in a better position.

Facebook News Feed overhaul plays into feedback loop

A closer examination of the long game that’s being played here would seem to suggest that the company is playing right into that psychological “feedback loop” that some Facebook executives have blasted social media firms for within the last several months because the goal is getting users to blow as much time as possible on the platform. Current management must think that these changes will get users to spend more time on the platform, and since ad space will be at an even higher premium, the company could charge more per ad.

So even though Facebook management has put forth an almost martyr-like announcement (we know this could hurt engagement—a.k.a., ad dollars—but we want everyone to be happier), it seems very unlikely that any real sacrifice is being made. As a result, Facebook stock bulls can relax because I highly doubt the firm’s revenues are going to take any huge hit.

GBH Insights analyst Daniel Ives boosted his price target for Facebook stock from $210 to $225 and maintained his Highly Attractive rating in a note last week following the first announcement of the changes to the News Feed. He added that the News Feed overhaul could be “worrisome” in the form of a hiccup” in ad growth, but he also feels that it was the right move for user engagement in the long term.

He also addressed another overhang for Facebook stock: the company’s plan for 2018 to be another major investment year. He explained that the company is investing in user and engagement growth, which he describes as the “consumer mousetrap,” a term we would attach to that feedback loop former company executives have been warning about.

Facebook stock downgraded for News Feed overhaul

In his own note on Friday, Stifel analyst Scott Devitt also said that he feels the Facebook News Feed overhaul will ultimately prove to be the right move “for the long-term sustainability of the platform.” However, he also warned that Facebook stock might remain pressured until the “economic implications” of the overhaul becomes clear.

Devitt initially maintained his $195 price target and Buy rating on Facebook stock, “but with less conviction than any previous moment” of his firm’s coverage of it. However, on Friday after considering the overhaul more thoroughly, he downgraded Facebook stock due to “uncertainty relating to the economic impact” of the News Feed changes.

On Thursday before the News Feed overhaul was announced, Devitt said in another note on Facebook stock that he was “raising the yellow caution flag” on it leading up to the next earnings report, which is scheduled for release on Jan. 31. At the time, he pointed out that Facebook stock had risen to with 4% of his price target.

Further, he saw “signs of moderation” in the most recent quarterly engagement metrics, and he said that narrative around the company has shifted toward “social impact,” which said concerned him. He also said that the Facebook News Feed overhaul seems to “run counter to its ability to monetize.”

Interestingly, Facebook stock seems to have recently fallen on his list of global e-commerce firms. In order of preference, he listed these as his top picks: Alibaba, Netflix stock, Amazon stock, JD, Priceline, Alphabet stock, and then Facebook stock in last place on his list.

Facebook News Feed overhaul to reduce regulatory risk

In a note on Tuesday, Needham analyst Laura Martin praised the Facebook News Feed overhaul and declared that it will be “economically neutral” and “strategically positive.” She reiterated her Buy rating and $215 price target on Facebook stock and explained that one reason she feels the company is so valuable is CEO Mark Zuckerberg, “a hidden asset,” according to her.

Martin feels that the Facebook News Feed overhaul will actually help the company avoid regulation. She pointed out that both politicians and psychologists (We would add former Facebook executives to this list regarding the “consumer mousetrap”.) have criticized the way the social network “potentially hurts democracy and individual users’ morale.” She also praised Zuckerberg’s handling of the criticisms.

Facebook News Feed overhaul to reduce regulatory risk

Reading some parts of Martin’s note was like recalling some of my initial thoughts last week when I first heard about the News Feed changes (see above), as she expects ad prices on the platform to rise as the amount of time spent on it and/ or the number of ad units declines. However, she’s also positive on the News Feed overhaul because she feels it will reduce the risk of regulation for the company. The social network is shifting away from content publishers, which include news outlets, and she believes that this shift lowers the company’s “perceived power to spread ‘fake news.'”

She believes that if Facebook did not take any steps to reduce its perceived power to influence public thought and elections, Washington might have stepped in to reduce the company’s growing power and influence. She believes the Facebook News Feed overhaul pulls the company “out of the limelight by promising to lower publishers’ content and re-focus on connection among friends.” She also pointed out that the overhaul appears to only affects the main Facebook platform and not Instagram, WhatsApp or Messenger.

Facebook stock initially tumbled in early trading on Tuesday before bouncing. As of this writing, Facebook stock is up 0.13% at $179.60 after falling as low as $179 per share.

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