Diving Into Facebook's Slackening Revenue Growth Picture

In this segment from MarketFoolery , host Chris Hill is joined by Maria Gallagher of Motley Fool Asset Management and summer investing analyst Troy Springer to break down the most interesting news from Wall Street -- and there's no question that anyone's rundown would start with Facebook (NASDAQ: FB) . Shares recently fell through the floor on word that the revenue growth rate was slowing significantly, and would continue to do so in the quarters ahead.

Beyond that, the idea that Facebook isn't yet sure how to monetize its Stories feature, and the surge in spending it plans around security and transparency, had investors heading for the exits. But Fools are more interested in long-term stories, and on that front, the view is more nuanced.

Maria Gallagher is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Maria Gallagher and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such.

A full transcript follows the video.

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This video was recorded on July 26, 2018.

Chris Hill: Our lead story today, and when I think about it, it's probably going to be the lead story on Motley Fool Money this weekend, it's of course, Facebook. Wow! Second quarter profits came in slightly higher than Wall Street was expecting. Troy, Wall Street could not have cared less about the profits, because Facebook's CFO on the conference call painted an incredibly clear picture of revenue for Facebook, and it's going down.

Troy Springer: Right, by high single-digits, going down about 8-9%. To put this in perspective, Facebook was down about four Twitter s (NYSE: TWTR ) after hours yesterday, falling about 20%. One thing I'd say about the revenue growth, 8 or 9% may sound like a lot for a normal company, but this is a company that grows revenue year over year at 40-50% every year. So, it might not be as scary as it sounds.

The main problem with their revenue growth is, they're unsure how to monetize the new Stories business. Snapchat has been in a similar boat trying to figure out a way to monetize Stories. Instagram's Stories has been a huge success. Because of that, Facebook tried to take Stories over to the Facebook platform as well as the WhatsApp platform.

On the conference call, when an analyst asked Sheryl Sandberg about monetization of these Stories going forward, she basically said, "We don't really know right now, and that's why we're revising guidance down."

Hill: Yes, there's that. Let's be clear, Mark Zuckerberg told us this was coming. We've know, Maria. He's been very clear about the fact, like, "We're going to be spending more money on security, we're going to be hiring more on security." But, again, when you have the CFO saying, "Revenue, high single digits lower than it was the previous quarter, and this is going to happen again next quarter. We're going to take another step down in high single digits, and the quarter after that."

Maria Gallagher: I think, though, that it's a strategic move for their future. While, on the conference call, he was talking about their investment in people and AI and how that's going to increase security, and how they've created this portfolio of all of the ads they have and who pays for them. I think their increased transparency in their apps is what's costing them a lot of money, and their AI in that is costing them a lot of money. But I think, to regain their name and the trust of the people who use Facebook, this is strategic choice for them for the future. I think that's really smart.

Springer: I don't think Mark Zuckerberg has ever cared about what analysts thought in the short-term. He actually sounded very Foolish on the conference call, saying, "We run this company for the long-term, not for next quarter." He opened up the call saying this was a solid quarter for Facebook. One thing I might add --

Hill: Can I just say that pretty much every investor today disagrees with that? I agree with you, he's very focused on a long-term. The stock is down about 18% today.

Springer: Right. What I will say about the stock, since the Cambridge Analytica scandal, it's been up 40%. This 20% drawdown doesn't look as bad in context, knowing that Facebook has been up 40% since then. I think a lot of times, as investors, we like to make a big deal about big one-day drop, because it's a visible number to look at. But in the grand scheme of things, Facebook has been doing well. I think they're a great platform with 2.2 billion users, and it's a safe investment going forward.

Gallagher: I agree. Archive was the word I was looking for, an archive of their ads. I also think, something to note that nobody asked about that I thought was interesting was, their average price for ads is up 17%. With this deceleration, I wonder if they're going to start charging more for ads. I think with their rhetoric around being helpful to small businesses, if this is going to be something that drives small businesses away, because they just can't afford to have ads on Facebook anymore like they used to. I thought that was an interesting statistic to bring up. No one asked about it in the questions part of the conference call, but I thought it was really interesting.

Hill: It'll be interesting to see, as you broaden the picture here and think about digital advertising dollars in general, if, in fact, they are not going to be flowing as readily toward Facebook, who stands to benefit from that? If you look at the stock performance of Twitter over the past year, that's worked out really well. I also feel like, if Snap (NYSE: SNAP) is ever going to do anything, right now is the time. If Snap can't make their bones in the next six months off of what's happening with Facebook right now, maybe it's time to pack up and go home.

Springer: I push back on that statement a little bit. A lot of people have said that Facebook's dip in revenue is Snap's and Twitter's space to gain, but I'd argue that Facebook, Instagram specifically, is such a powerful platform. Instagram is continuously leading Snapchat and out-innovating Snapchat, and especially Twitter. Their new Instagram TV is going to be more revolutionary than Instagram Stories. Video is a huge way that Facebook is going to continue to monetize their platform, both on Instagram and on Facebook.

Chris Hill has no position in any of the stocks mentioned. Troy Springer owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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