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Yamil Berard
Yamil Berard
Articles (168) 

Facebook's News Feed Change Spooks Digital World

The change is having catastrophic effects on some digital media

March 09, 2018 | About:

After decades in advertising, Ryan Goff has seen a lot.

Goff, chief marketing officer at a leading Baltimore agency, saw Craigslist scoop up millions of dollars in classified ads that once appeared in U.S. newspapers. Then he saw Facebook (NASDAQ:FB) lure advertisers in record numbers.

In fact, many of Goff’s clients dedicate a major chunk of their annual marketing budgets to post ads on Facebook.

So, imagine Goff’s panic when he learned the social media giant was giving a back seat to ad content.

“We’ve invested a lot of time and energy for our clients in building their Facebook pages and building their Facebook following and establishing communities that generally like the content that we’re producing,” said Goff, who heads up Baltimore’s full-service marketing agency, MGH.

It will take time to grasp the overall effect of Facebook’s algorithm change, which prioritizes personal posts over brand content.

But advertisers like Goff shouldn’t worry too much. Facebook likes its advertising revenue, a lot. Earnings in the fourth quarter attributed a 47% climb in overal revenues to a whopping surge in advertising dollars.

The change, however, is having a catastrophic impact on others, including news organizations and digital publishers. LittleThings, a publisher of content for mostly women, announced last month it was shutting down after a dramatic fall in organic traffic.

Goff had anticipated a 50% drop in views of unpaid posts, known as “organic reach” by Facebook.

“It was very frustrating for Facebook to make the assumption about what users want,” he said. “They made a drastic move without a lot of reason behind it.”

But that didn’t happen.

Three to four of his clients saw a fairly minimal decline.

But, for the most part, the majority of clients saw a slight increase in rates of engagement.

Goff says Facebook may be rewarding paid advertisers with stronger organic reach. But that's all speculative.

"It's very rare (for Facebook) to put a post out there without some dollars behind it,'' Goff said. "Paid engagement may be driving organic. That may be something that is happening behind the scenes."

Years ago, 100% of followers would see a post on a person's news feed. That changed as news feeds became more crowded. Today, of 100 folowers, maybe five of them would see the same post, unless there were some dollars behind it.

Jump in total revenues

A snapshot of fourth-quarter earnings show Facebook is deeply invested in money it receives from advertisers.

In the final months of the year, the California-based social media giant reported a 47% jump in total revenues, at nearly $13 billion for the quarter ending Dec. 31. That compared to revenue of $8.9 billion during the same period in 2016.

The growth in revenue was largely attributed to the company’s advertising revenue, which, at $12.8 billion, soared by 48% compared to $8.6 billion in the fourth quarter of 2016. (Earnings per share for the quarter were $1.44 compared to $1.21 year over year. Earnings reflected a $2.27 billion hit as part of the 2017 Tax Cuts and Jobs Act. The impact was a drop of 77 cents in earnings per share. Adjusted earnings per share without the tax hit were $2.21 a share versus analysts' expectations of $1.95 a share.)

Wall Street had been jumpy about Facebook earnings early this year. The company’s flat stock price and criticism over fake news and Russian bots had raised anxiety levels.

As a result, the stock dove 4% in after-hours trading after the company released fourth-quarter earnings. By the next day, however, bullish estimates put the stock as high as $265 a share. By late afternoon, shares were up 4% to $194.70. A number of analysts listed it as “buy” or even “strong buy.”

In Thursday trading, the stock was at $184.98, up 1.45%. The stock is up 3% over the last three months.

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Financial figures

The social media giant has a market cap of $537 billion. It has a price-earnings ratio of 34.22 versus an industry median of 30.40. It has a price-book ratio of 7.23 versus an industry median of 3.43. Facebook has a price-sales ratio of 13.45 versus an industry media of 2.48. It has no debt. Its rate of revenue growth per share over five years is 42%. It posted diluted earnings per share of $5.39 over a trailing 12-month period.

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The company's Piotroski F-Score is an 8, which indicates a very healthy situation.

GuruFocus identified one severe earning sign, which deemed the company’s growth in assets is on a faster pace than its revenue growth. This could signal the company is becoming less efficient.

GuruFocus rates it a 10 out of 10 in financial strength and 9 of 10 in profitability and growth.

In the fourth quarter, only George Soros (Trades, Portfolio) exited his position in Facebook, while more than two dozen gurus held shares in the hundreds of thousands in their portfolios.

The Peter Lynch chart suggests the stock price is overvalued. The median is around $80 a share.

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