Facebook (NASDAQ:FB) has been on a tremendous run. Shares of the company are up 33% over the last year versus 6% for the greater Nasdaq-100 index. It's not as if Facebook's run is undeserved; the company has continued to grow revenue, users, and profit at rates higher than Wall Street expectations. As a result, analysts have a one-year target price for Facebook at $154, approximately 24% above its current price.
While price targets are often wrong, there are industry-wide tailwinds that bolster the bullish case. Advertising spending continues to shift from television to digital outlets. In particular, mobile spending has exploded and will continue to do so according to eMarketer. And with 1.57 billion mobile monthly active users, or MAUs, Facebook is the largest beneficiary of mobile ad spending.
More recently, however, there's been a few threats to the company's business model. When viewed individually, it's easy to dismiss these concerns as inconsequential. When viewed together, however, it points to a company that may have more risks than Wall Street currently realizes.
Procter and Gamble finds Facebook's hyped targeting prowess may be overstated
In the marketing realm, there's no company more influential than Procter & Gamble. The multinational consumer-goods conglomerate boasts 22 individual brands that gross over $1 billion in sales annually. Many of which are in the fast-moving consumer goods, or FMCG, market characterized by frequent purchases and intense competition. In the FMCG industry branding and marketing matter a great deal, so it's no surprise P&G is the biggest advertising spender in the entire world with a significant portion of that going to Facebook.
Facebook has been so successful in digital marketing because of the vast amount of data it has on each user. Presumably, this data can be used for targeted ads, which are generally more effective. However, The Wall Street Journal (subscription required) reported P&G announced this month it would stop its practice of targeting, finding the process has "limited effectiveness."
Whether or not targeting effectiveness is the issue -- or if P&G's advertising strategy is lacking -- is of little consequence, as marketing is one of those fields where it's hard to gauge effectiveness and perception is reality. But it has been these targeted ads that have allowed Facebook to charge above-average rates for ads and kept ad-load low while expanding revenue. A shift away from targeted ads to broad, cheaper ads could present headwinds to top-line growth.
An ad-blocking arms race
Additionally, Facebook is locked in a cat-and-mouse game with ad-blocking software. This month the company announced it would incorporate ad-blocking-blocking technology on its desktop site. Essentially, the company would make it harder for plug-ins like AdblockPlus to filter out its ads. Within a few days the open-source community had found a workaround, or an ad-blocking-blocker-blocker, which allows you to browse the site without ads even after Facebook's update.
It's important to note this alone is not a major concern. My thoughts are Facebook and the ad-blocking community will continue to play this whack-a-mole game to the point the average user will no longer care. Additionally, ad-blocking technology does not work on Facebook's mobile app, which is how the vast majority of its MAUs access the site. What this signifies is the growing resistance of users to advertising, which could affect Facebook in the event it has to increase ad load to make up for falling ad rates if there is a shift from targeted ads.
Growing apprehension from content providers
The last risk is important. First, it's important to note that while Facebook is the largest outlet by mobile ad-spend, it doesn't really create its own content. Instead, it uses the content from unpaid contributors (aka users) and attaches advertising. This description is not to dismiss its business model, but to describe the risk of disputes with its user base.
Until recently, the digital publishing community, a major source of content, had looked at the relationship with Facebook as a win-win. A simple look at the fact both entities are competing for the same advertising dollars, essentially eating from the same trough, would have told you this was fiction.
Publishers appeared to have gotten the memo. A few changes Facebook has instituted -- limited advertising in exchange for inclusion on the company's Instant Article feature, then changing rules to the detriment of publishers' native-advertising businesses, and Facebook limiting publishers' reach -- have given publishers reason to pause.
Television, at this point, is very apprehensive about negotiating with Facebook on displaying their video content. The Wall Street Journal (subscription required) notes the NFL, Walt Disney Company, and Comcast's NBCUniversal are not looking to deal with Facebook as the dual concerns over ceding control of content (see paragraph above) and a shift to digital ad spend may present more risks than the incremental revenue they'd receive.
These issues show how important the company has become
It's important to restate none of these situations are incredibly important to the company's stock performance on their own. When taken together, however, it shows a company that has transitioned from prey to predator. But as the company continues to transition from just another marketing outlet to the most important force in marketing, concerns like these will most likely increase in both scope and severity. It would behoove investors, myself included, to note these new risks to Facebook's business model.