INTRO: 10 years ago, Facebook was the up and coming
social media company that people couldn’t get enough of.
Mark Zuckerberg was the next child prodigy like Bill Gates and Steve Jobs reaching the
billion dollar mark at just 23 years old.
It seemed like he was going to build one of the biggest companies in the world, and that’s
exactly what he did.
But, people aren’t exactly happy with his rise to the top.
Facebook’s rise has been riddled with controversy and privacy concerns, and this isn’t surprising
given that the company’s entire business model revolves around selling data to advertisers.
In fact, things have gotten so bad that Yahoo finance ranked Facebook as the worst company
of 2021.
Despite all this bad press that Facebook has been receiving for years now, this negative
perception never really hurt their bottom line.
People continued to sign up for WhatsApp and Instagram and Facebook was a stock market
favorite.
In mid 2021, Facebook even reached a market cap of $1 trillion, but unfortunately for
Facebook this seems to have been a significant top.
Since then, Facebook has shed over 50% of their valuation.
This correlates to a market cap loss of $584 billion.
If you made a company out of just their market cap loss, your company would be the 9th largest
company in the world.
Considering this, I don’t think you’d be surprised to hear that Facebook is part
of the top 10 worst performing stocks in the S&P 500.
So, how did Facebook go from being a silicon valley favorite to being one of the worst
performing stocks on the market?
LACK OF USER GROWTH: One of the leading factors behind Facebook’s
recent downfall is a lack of user growth.
In fact, not only is Facebook’s user base stagnating, but the first signs of a decline
are starting to surface.
In the last quarter of 2021, Facebook had a net user loss for the first time in their
history shedding a total of 500,000 users.
This is extremely bad news for Facebook because it shows that even Facebook is not safe from
being replaced.
Historically, the social media space has always been a fast moving world as people jump from
one platform to the next.
First, there was Friendster, and then we saw the rise of MySpace followed up by the explosions
of Twitter and Facebook.
After this initial web based era, we saw a new era centered around apps including WhatsApp
and Instagram and then SnapChat and now TikTok.
Considering this rapid evolution, investors have always been vary of investing in social
media companies.
The next big thing could become yesterdays news within just a few years.
For example, ya’ll remember Vine, Yik Yak, or Google Plus?
Clearly, things change on a dime within the social media industry.
Despite this, with facebook, many investors felt that things would be different.
As industries mature, they can support bigger and more stable companies to form.
For instance, just take a look at Google.
When they launched in the late 1990s, there were dozens of different search engines on
the market and they each had a sizable user base.
But overtime, one search engine after another fell of the map and Google rose as the winner.
The same thing could be said about the browser and email spaces as well.
Initially, the crown was passed around frequently, but with time there was only one winner.
Considering this, many investors felt that Facebook would become the Google of social
media, and Facebok has actually down a tremendous job at accomplishing this.
We just have to take one look at Facebook stock vs Twitter stock to understand just
how well Facebook has done even with their recent decline.
Despite this strong performance, over the years, it has become clear that Facebook isn’t
really comparable to Google.
You see, with Google, while they’ve completed dozens of insane acquisitions over the years,
each of these have expanded the business, not cannabilized the old business.
Google’s original services including Google.com, Gmail, and Google chrome are all still thriving
parts of there business today.
The same cannot be said about Facebook.
I mean if we’re being honest, who actually uses Facebook today?
The only reason that Facebook was able to grow for so long is their strategic acquisitions
of Instagram and Whatsapp.
And this means that if Facebook wants to continue strong growth, they have to constantly acquire
the next big thing and this is simply not a very sustainable business model.
I think Zuckerberg realized this several years ago, and that’s why he slowed down on acquisitions
and is instead focusing on VR and the metaverse.
These endeavors have yet to really take off though, and in the meantime, Facebook’s
stagnating/declining user base is a massive red flag that investors can’t ignore, and
this is causing them to leave in droves.
ATROCIOUS USER SENTIMENT: Aside from declining user numbers, people
who are still using Facebook aren’t exactly the biggest fans of the company.
In fact, the same people often leave comments on YouTube about how Facebook is the epitome
of evil big tech.
And given Facebook’s history, this reputation isn’t all that surprising.
Likely the biggest red mark on Facebook’s scorecard is the Cambridge analytica scandal.
If you’re not familiar with this scandal, here’s what went down.
The story circles around a British political consulting firm called Cambridge Analytica
that was willing to go to any lengths to win votes for their clients.
Executives of the company were actually caught on camera saying that they were even willing
to use bribes and misinformaiton to help their clients win votes.
When this footage went viral, the company tried to downplay their intentions suggesting
that they would never actually engage in such activities.
But, a whistleblower named Christopher Wylie would soon prove that this was not the case.
Christopher revealed how Cambridge Analytica’s associates used a Facebook app to mine the
profiles of 50 million people.
Cambridge Analytica then turned around and built software that was specifically designed
to influence people’s choices in elections.
I don’t think I need to explain why this is morally shady and how it interferes with
free and fair elections.
And though it wasn’t Facebook themselves that was engaging in such activities, it was
their platform that allowed this to even take place.
In fact, Facebook themselves confirm that Cambridge Analytica did not break any policies
when it comes to collecting this data.
It wasn’t until they transferred the data out of Facebook that they broke their polices.
As you would guess, people nor prosecutors were exactly convinced by this reasoning,
and they would crackdown on Facebook hard.
Too often, we see companies that have committed terrible crimes walk away with measly fines
of $100 or $200 million which is insignificant compared to their profit.
But with Facebook, the FTC imposed a $5 billion fine.
Not only was this a record breaking fine, but it was 20 times larger than the previous
largest privacy and data security penalty.
Now of course, a lot of ya’ll would argue that even this is not enough for Facebook,
but the FTC did try their best.
And though Facebook was able to survive this nightmare, user sentiment has never been the
same.
In fact, even individuals who have literally made billions from Facebook have turned on
the company including Whatsapp and Instagram’s founders.
Likely the most outspoken of this bunch is WhatsApp’s cofounder, Brian Acton, who straight
up advocates for people to delete Facebook.
Given that such figures have turned on Facebook, it’s not surprising that stock investors
have also turned on Facebook.
Even investors who are fundamentally bullish on the company, are cautious of investing
in the stock simply because they don’t want to hold such a contreversial company.
And unless Facebook changes this overwhelming negative sentiment against them, I think it’s
going to continue to be quite a difficult uphill battle for them.
APPLE PRIVACY CHANGES: A lack of user growth paired with atrocious
user sentiment is already bad enough, but the nail in the coffin for Facebook was Apple’s
privacy changes last year.
In April of 2021, Apple started giving users the option to choose whether they wanted to
let apps track their activity.
And as you would guess, basically everyone chose to prevent apps from tracking their
activity.
Within just a few weeks of this feature launching, 96% of users opted out of app tracking.
And honestly, I think that the 4% that did allow tracking might’ve pressed allow accidently.
And given that 97% of Facebook’s revenue comes from advertising, this was extremely
bad news.
In fact, Facebook projects that Apple’s privacy changes will cost them $10 billion
in revenue just this year.
At first, Facebook tried to fight against these changes.
They tried to convince people to press allow, and there were even rumors suggesting that
Facebook was preparing an antitrust lawsuit against Apple.
But, I think Facebook eventually came to a realization.
This was a battle that they could never really win.
Even if they took Apple to court and won the lawsuit, this would just make users resent
them even more leading to even greater losses in revenue.
Instead, it looks like Facebook has chosen to take a similar stance to SnapChat’s CEO
Evan Spiegel.
Evan insists that even though these changes are brutal for the business in the short term,
it’s needed for the industry in the long term.
And this is a very important point because the truth is Apple’s privacy changes last
year are likely just the first of many.
10 years ago, most people didn’t know how companies like Facebook and Google made money
and frankly they didn’t care.
They were able to use a great service for free and that’s all they cared about.
But, as more of these quote on quote “free services” enter the market, people have
become quite aware of the inner workings of these companies and most people are not big
fans.
This has caused privacy to become a focal point amongst customers and newer social media
companies aren’t focused on being free but rather being private.
Take Signal for example.
Signal is a non-profit encrypted instant messaging system created by one of Whatsapp’s cofounders
Brian Acton.
And as of the end of 2021, it has a total of 40 million active monthly users.
Now of course, this is just a small percentage compared to WhatsApp’s 2 billion active
monthly users.
But with people like Elon Musk supporting Signal, I think Signal’s user count is only
going up with time.
Also, I don’t think Signal is just some anomaly either.
Rather, I think that it’s the beginning of a trend towards private social media servies
which again spells disaster for Facebook.
META: Despite all these shortfalls surrounding Facebook’s
social media business, all hope is not lost for the company.
Given the enormous size of Facebook, they have atleast 10 years to figure something
out and change the direction of the company.
And given that Mark has been working on steering Facebook away from social media for years
now, it looks like he’s on top of this issue.
He even went as far as changing the entire company’s name which is usually something
you never want to do for brand recognition purposes.
I guess he realized that the brand Facebook wasn’t doing the company any good.
Looking forward, it looks like the main goal seems to be growing their VR business and
the metaverse which is a pretty solid bet given that this does seem to be the next big
thing.
It looks like even Apple is betting big on AR/VR technology.
But, something to note is that even if VR is the next big thing, there’s no guarantees
that Facebok will come out on top just because they’re one of the first people there.
After all, Facebook themselves wasn’t the first social media company in the world.
With that being said though, being large and first does have it’s advantages, so we’ll
just have to wait and see.
Do you guys have a positive opinion on Facebook?
Comment that down below.
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