Is This The Beginning Of The End For Facebook? Reasons For Concern For Investors

Timothy Woods profile picture
Timothy Woods

On the face of it, everything seems fine with Facebook (FB). The company just announced a 38% revenue increase for the 1st quarter of 2013, with mobile advertising accounting for 30% of advertising revenue. It's user base, standing at over 1.11 billion, is unrivalled and it has launched new projects, Facebook Home and Facebook Messenger. However, there is certainly enough reason for investors to be wary.

In defending Facebook as a strong stock commentators have pointed to the social network's 1.1 billion users as proof. However, what these commentators are failing to grasp is that Facebook may have a huge user base, but users are just not using the site as much as they once did. Most will still use the site, just not as much as before, though they are still counted as full fledged users.

The Competition

Facebook is now being overlooked by increasing numbers of users in favor of more niche services. Facebook was created to allow users to do everything all in one place; talk to friends, read news pieces, upload photos and play games. However, as pointed out by Timothy Stenovec, there are other websites that offer these services too, but concentrate on only one service and do it better than Facebook. Much better. Instagram, the Facebook-owned site, is now the reference for uploading photos, LinkedIn (LNKD) offers business news and industry leadership thought where Facebook simply cannot compete. For instant messaging, Whatsapp is now the preferred choice, given its efficiency, welcoming user interface and of course, there is no SMS fee. It handles a staggering 20 billion messages every single day. Who knows what Yahoo (YHOO) will do with Tumblr, the blogging and social networking site, now that its acquisition has been approved for $1.1 billion, but cutting in on Facebook's dominance is bound to be on the agenda. Then there is Google's (GOOG) Google Plus, Skype and Path, among others. The competition has become much more intense, in number and in quality. If anything, it will become even fiercer.

The new projects launched by Facebook; Home, Poke, and Messenger, have not been received as warmly by users as Facebook would have liked, almost certainly due to consumer preference for other options.

Facebook's Future

Facebook has reached the point of saturation, though we could start to see the beginnings of a decline in user numbers, or at the very least, a significant slide in the amount of time spent on average by users on the site. This will invariably have a knock-on effect on advertising revenue. Less user activity means less clicks on adverts, less user exposure to the adverts, and would inevitably lead to less commercial revenue for Facebook.

Additionally, it has always been a point of discomfort for a considerable portion of users that every word, every article read, every "like", every photo uploaded or commented on, and everything else is all logged and stored by Facebook. This is unavoidable and has surely irked many users. Only recently have we seen a rich list of really viable alternative options for users. The real danger for investors holding Facebook or interested in buying Facebook is that more users could, and very likely will, migrate to other services, either abandoning Facebook altogether or, what is more likely, just not using the site as much as before.

For now Facebook appears okay to investors. It has just announced healthy quarterly profits, though with the sheer amount of competition, and the fact that now it is being outshone on many areas by a multitude of rivals where the social networking giant was once the undisputed choice for users, investors should be very wary of Facebook's long term prospects for investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Timothy Woods profile picture
I write on currencies and financial markets.I've worked in fintech and foreign exhange for over two years.Concentration on:Macro movements and effects on currencies and equity marketsCurrency market movementsOutlook on future for currencies and other asset classesThanks for readingTim Woods

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