Facebook Is Dying, Wall Street Just Doesn’t Realize It Yet

I mostly write about Crypto. I’ve written about “Why Crypto’s A Growing Threat To FAMGA (a.k.a. Facebook, Apple, Microsoft, Google and Amazon)”. But that’s in the future. This is a post about how Facebook is in decline today, even before Crypto has an impact.

I became the original Facebook bull after I published the first Wall Street style research report on Facebook in March of 2010. My 2014 revenue forecast was off by just 1%, because I focused on one thing, engagement. As Facebook continued to increase user engagement (defined as DAUs/MAUs once the company started reporting results), I continued to be a Facebook bull, for eight years. Simply put, I believe that sites are growing engagement, or they’re dying, and for eight years, Facebook was growing user engagement.

But when the company reported Q4 ’17 earnings on January 31st, 2018, for the first time in it’s history, Facebook’s user engagement declined, and I turned bearish, penning this blog post to note the occasion. It’s been 15 months since that post, and time has proven it to be prescient. On April 25th, 2018, Facebook reported Q1 ’18 earnings, and Wall Street applauded the results, sending the shares up 10%, adding $45 billion in market cap, as Facebook’s revenue surged 49%, year-over-year, to $12 billion. While Wall Street cheered, I saw another signpost of Facebook’s decline. On April 24th, 2019, Facebook reported Q1 ’19 earning, and once again, Wall street applauded, sending the shares up 8%, adding another $45 billion in value. While some saw triumph, and others saw further reason to break Facebook up, all I saw was continued decline in the only metric that matters, engagement.

The One Graph Facebook Investors Don’t Appreciate

While Facebook presented 18 slides on their earnings conference call, they didn’t present the one below, which, in my opinion, is the most important graph of all. It shows the year-over-year change in user engagement, which is defined by Facebook as Daily Active Users/Monthly Active Users (DAU/MAU). It’s not a pretty picture:

Facebook is dying. At the moment, it’s a slow death, but at some point, it will accelerate. That’s what social networks do. They grow engagement, until they don’t. Interestingly, Facebook blamed the first drop in engagement on the fact that they were trying to stop people from being able to do the thing people like to do most on Facebook…… read fake news.

What Wall Street Misses

The main thing that Wall Street misses is that revenue is a lagging indicator of engagement. So revenue is still climbing dramatically (up 26% y-o-y), catching up to engagement growth of years past. When revenue starts slowing dramatically in 2020, which it will, Wall Street will be caught off guard.

But What About Instagram and WhatsApp

Both are insanely great products that have attracted massive audiences. That said, there are two reason I don’t care. The first is, the properties monetize at a fraction of Facebook today. That could change, but, my second points is …. if things are going so great, why don’t we get more metrics on those properties? I rarely write negative pieces. But I did write a piece before SNAP came public when I said, buyer beware, because they didn’t release the relevant numbers, because, I assumed, they were bad. And they were.

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