January 31, 2018 / 10:13 PM / 24 days ago

Breakingviews - Zuckerberg’s persistent warnings bear heeding

NEW YORK (Reuters Breakingviews) - When Mark Zuckerberg worries, investors should listen. The Facebook founder and chief executive has been flagging for months that ad revenue was set to slow. Now, tweaks designed to make the social network less divisive are hindering engagement and stifling user growth. Facebook has rarely disappointed investors; this could be the year.

Zuckerberg’s Harvard dorm-room creation has had a remarkable run since it went public in 2012, its value ballooning to more than $540 billion. Financial results reported on Wednesday show the party continues. Revenue for the fourth quarter of 2017 rose 47 percent to $13 billion, while earnings increased by a healthy 20 percent, even with a tax haircut from Uncle Sam. Facebook has beaten analyst estimates for full-year earnings every year since it went public.

Sill, several issues point to a day of reckoning. Zuckerberg’s usual peppy statement that accompanies earnings releases was less so this time around. Changes to Facebook’s news feed feature meant that time spent on Facebook – an important metric to sell advertisers and investors alike – declined by 50 million hours every day.

The tweaks are definitely necessary. The idea is to address Facebook’s role in presenting fake ads that may have swayed the 2016 U.S. presidential election. Moreover, the Silicon Valley firm has inadvertently helped to entrench partisan divides, through the “filter bubble” phenomenon, where users are bombarded with ads and posts that reinforce their existing views.

But the changes are also painful. Zuckerberg recently posted a series of messages on his Facebook promising content that is “good for your well-being and for society.” It sounds like a serving steamed broccoli to a group hungry for chocolate.

Facebook has come down to earth in more ways than one. Three years ago, it traded at roughly 40 times forward-year earnings, twice the multiple of more mature rival Google. Now, the two have converged at around 28 times. Zuckerberg may be helping make Facebook more helpful to society, but the changes that entails may do the opposite for investors.

Breakingviews

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