The Social Financial Retrenchment – Where Next for Facebook and Twitter?
Tech (and social in particular) has been the darling of the financial world for quite a long time now. Certainly it has seen its ups and downs with unicorns aplenty and the dot-com bubble/other tales of woe to weigh on the black ink in investors accounts and turn it red, but this week has seen some remarkable shifts as both Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) have seen 20% collapses in stock prices with Facebook wiping out its gains for the year on the basis of worrying KPI metrics and forward guidance in the wake of their earnings.
This is also having some knock on effects with Snap (NYSE:SNAP) declining over 5% at one point even though it hasn’t reported earnings yet (due 7th August) with expectations of an adjusted loss of $0.18 per share and revenue slightly over $250 million.
Where is all this carnage leading us? Is this the beginning of the end of the social media boom years? Do Coca-Cola (NYSE:KO) and IBM (NYSE:IBM) levels of boring stock price and dividend paying maturity beckon? Not so fast…
Social Media – Still Finding It’s Feet
Social media has both ridden and contributed to a large part of the tech boom. From the early days of friendsreunited and myspace to the behemoths of today, billions of users around the world regularly login to their poison of choice and decide to let their data be monetised for a free service. As with many areas in business, maturity has led to consolidation as the entrenched players build or buy their way into new areas (Facebook with Instagram and WhatsApp, Google with Google+ and YouTube, Amazon with Twitch, Verizon/Oath with AOL, Yahoo! And Tumblr).
Chinese equivalents have also sprung up in the shape of Qzone and Weibo with the usual suspect companies involved in them including Tencent (HKG:0700) and Alibaba (NYSE:BABA), but these are somewhat different beasts by virtue of the political and regulatory environments in which they operate (China).
So what we’re facing is really one major dominant player in the west in the form of Facebook. Its entire business is about social media and user monetisation. It does this effectively being profitable and it has a CEO with almost absolute control given the voting rights financial engineering manoeuvre Zuckerberg pulled off when he took the company public. Other players like Twitter and Snap have users but have struggled with controversies and profitability. This is perhaps most telling in the year that Facebook and its CEO have faced in the wake of the Cambridge Analytica scandal along with fake news and apparent election manipulation attempts.
As such, much like political back and forth over time with different parties and politicians coming to the fore as well as backlashes against some aspects of global free trade in the shape of the Trump election victory and the Brexit vote in the UK, what we’re seeing is a likely pause to take a breather as an industry struggles to grapple for its identity and how it should be run.
The Democratisation of Investing
In the era of the dot-com bubble, one of the issues often cited as one of the possible causes of the bubble was the massive amounts of retail money which was pouring into the market directly for the first time in history. Investing has historically been a pricey game. Stockbrokers don’t come cheap but the online world had opened up to retail investors the ability to trade for themselves in a relatively inexpensive way for the first time ever. People with no idea about how to value a company were all of a sudden piling in with their life savings simply because there was an IPO and the company going public had a name with “.com” as part of it.
A bubble was inevitable, as was the subsequent collapse when the world at large realised that many of these companies had no real business, plan or route to profitability. Many people learnt an expensive lesson in the dot-com bubble and a lot of people are now more wary of investing and do some genuine research on their own before deciding whether to invest in startups or not now.
Out of this, a wiser retail investor has emerged, as well as even cheaper ways of accessing the market in the shape of brokers like Robinhood (popular with young people) as a free way to trade. What we’ve been seeing in the wake of the Facebook collapse is a large number of users effectively buying the dip with the app showing about 30,000 more users owning the stock than a week prior to the earnings announcement and subsequent collapse. Do they know something we don’t or are they playing a hunch?
The Real Question: Social Media Regulation
The social media equation (and Facebook in particular) are likely to be defined over the short to medium term by how well they answer the question of regulation. Fake news and data leaks are obviously a problem but the chances are that with its vast resources (both monetary and user), Facebook is likely to overcome the regulatory hurdles which it will probably face as the largest western social media platform. A buy of Facebook is pretty much a vote of confidence in Mark Zuckerberg. Regulation is coming, GDPR has already made waves in Europe and other regimes will likely be instituted around the world in regions where the company has a lot of users.
Twitter and smaller platforms may struggle or be slower to respond, but the likelihood of social media all of a sudden going bust in the face of regulatory scrutiny is low. Twitter has been relatively successful in turning its business around from a couple of years ago when it was losing money and users to now being profitable (although user engagement isn’t looking great right now, hence the collapse in stock price), but the Robinhood users are probably right. If you’re going to back a social media company with your own hard-earned, you’d probably put it into the behemoth that is Facebook and Zuckerberg if you’re looking for a company that will traverse the incoming regulatory landscape and still turn a profit.