Right around this time, before Facebook (NASDAQ:FB) issues its quarterly earnings, investors are hit with news of how either Facebook's user base is falling apart or they have hit a road bump in ad load. You name it and it is called out in the weeks leading up to earnings. It's a fascinating trend that has repeated itself several times over with the same results - Facebook delivers and the stock responds in kind.
Remember when reports in 2014 were saying teens were leaving Facebook in droves? Yeah I don't either. That's because Facebook grew revenue by 44% and earnings by 38% between that report and the full year 2015 earnings release.
Undoubtedly in your weekly investing homework on Facebook, you have seen the latest reports that publishers on Facebook are seeing a drop in traffic and original content being shared is down "dramatically." This kind of negativity is nothing new and just another episode in a series of "Facebook will fail ... eventually."
First of all, has anyone stopped to consider the numbers these negative reports produce are actually because of a very positive back end reason? Probably not, so let me first share with you my thoughts, which have yet to cross the tape.
If you have many users sharing information and it starts out with no other products such as messaging, a sharing button or even pictures of your vacation (albums), you have one very small medium of which you can share - your status and personal updates. If this content makes up 100% of the platform, it is clear everything on it is original. As you add new products you begin to have more mediums for original content (like pictures), but you also add a sharing button for that funny post you saw somewhere else on the web or that meme that is making the rounds. Now some of the original content is mixed with some non-original content. Let's say it becomes 80/20 original to non-original. That's a 20% decrease in original content, but no one went anywhere. What happened was more information was added and more products kept users on the platform.
It comes down not to the percentage of content from measured period to measured period but the stickiness of the platform. Other opinionated writers will tell you that a lack of original content is the beginning of the end simply because you can find this information anywhere on the internet. Aside from the fact that this is an affirmation of the obvious (you mean I can Google (NASDAQ:GOOG) (NASDAQ:GOOGL) search that image, too?!), it leaves out one key point: users are not leaving Facebook to get the information they want.
The metric of original content as a percentage of overall content is irrelevant on its own because if users are still sharing original content, they are also not turning to outside websites for non-original content. Instead those outside sources are shared within the walls of the platform. This is exactly what Seeking Alpha editors and staff want us as contributors to do; share links that originate on this platform so you don't leave the confines of where you read this exact text. If this were Facebook then some of my above links to fortune.com or time.com would have already been shared within the platform and, using the example here, I would link to the article that appears on SA showing the Fortune article content.
But I don't intend to inundate you with original thinking (see what I did there?), which tries to make sense of the garbage and random numbers thrown at you on a weekly basis. My point here is that none of that matters, as long as Facebook delivers.
Nothing we've seen, from teenagers "fleeing" to "original content," has affected Facebook's top and bottom line. Here's my advice to you: ignore the noise ... all of it. Because that's all it is - noise.
But if you're feeling uneasy about simply ignoring it on my word, let me give you some reassurance. Let's go back to the fleeing teenagers I opened the article with. It appears a January 2014 time frame is where the numbers became "real" to those with data. Financially, Facebook in Q1 of 2014 reported revenue of $2.5 billion and net income of $885 million. If teenagers were a problem that affected the investment thesis, we would certainly see some kind of wavering in the financials. Let's fast forward to Q1 of 2015 to see how it compares. Revenue grew to $3.54 billion while net income rose to $1.12 billion, good for a year-over-year increase of 41% and 26.5%, respectively. Looks pretty good to me. The stock price between that time? Up nearly 44%. Sounds really good to me.
Let's jump to this most recent "perilous" indication of Facebook failing on the user activity front. Since I've already indicated what Q1 of last year looked like, I'll just convert it to EPS to better compare to estimates for this quarter. This year estimates are for $0.63 per share on $5.24 billion in revenue. This compares to last year's $0.42 in earnings per share which would be good for a 50% growth in earnings on a 48% growth in revenue.
If this were to be accurate and Facebook either delivers or over delivers, then this again is a case of more noise - more annoying, irrelevant noise. You can read and listen to other authors and analysts about how all of these user metrics falling (which as I covered probably debunks their own conclusion) means something to Facebook, but until they can show you it is actually affecting Facebook's financials - which is all that matters to those of us investing - it can continue being blocked out.
The metrics and numbers spit out by detractors of Facebook are relevant if put in the correct context and with the correct backdrop. But, they are meaningless if they have no relevance on how much money Facebook takes in and how much drops to the bottom line. The stock price does not move on user metrics… ever. The only reason the stock price moves in reaction to this kind of news is because of the worry that it may actually affect the revenue and cash flow.
What I've concluded here is that this information hasn't affected the financials. Facebook has produced cash at anything but a worrisome pace that would caution me to stop holding onto the stock. While others may take victory in small battles of shorting the stock for insignificant, daily fluctuation gains, I continue to extend massive gains from predictable, consistent growth... all while ignoring the noise.
Disclosure: I am/we are long FB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.