Social media stocks slammed as user growth slows for Facebook and Twitter

The world of social media was up in arms last week, but it wasn’t users that were in uproar.

Social media investors saw the values of Facebook and Twitter slide to recent lows on the back of disappointing company results that could potentially be signalling “bifurcation” amongst social media valuations including the so-called FANG stocks (Facebook, Amazon, Netflix and Google).

In other words, social media valuations may have reached a peak.

FANG stocks have been strong pacesetters for the wider equity markets last year, given their strong commercial performance and rapidly growing user numbers that have attracted advertisers and revenues.

Social media has been a huge driver for user monetisation with companies such as Facebook, Twitter, Instagram and LinkedIn all raising their valuations on the back of strong social media adoption.

However, social media momentum is visibly slowing which in turn raises fears that the social media gravy train could soon be coming to an end.

Facebook blues

Facebook said it expects to face lower profit margins for the next two years while reporting its quarterly results on Thursday last week.

The world’s largest social media company reported that the average number of monthly active users during Q2 2018 was 2.23 billion – around 20 million fewer than expected.

The news precipitated a 20% decline in its share price and shaved its market capitalisation by around US$120 billion.

Facebook’s single-day plunge dragged the tech-heavy Nasdaq index (the leading tech index in the world) down 1% — its largest one-day drop in the past month.

Twitter follows

Meanwhile, Twitter shares fell 21% and shed around US$5 billion from its market value after investors were spooked by news that the number of active monthly users fell from 336 million to 335 million over the past three months.

The San Francisco-based company warned investors to expect user numbers to fall further as it took greater action to block fake and offensive accounts.

According to the Washington Post, Twitter deleted more than 70 million illegitimate accounts in May and June alone and says it continues to delete accounts at a rate of 1 million per day. The statistics raise doubts over the longevity of social media business models that rely first and foremost on genuine new users.

The wider market interpreted Facebook’s and Twitter’s results as indicative of wider investor fatigue relating to dwindling social media user numbers across the board.

Snapchat next in line

Investor attention now turns to Snap – the world’s 3^rd largest social media company and owner of Snapchat – which is due to report its results on 7 August, 2018.

Market analysts expect Snap to report weaker than previously-expected results and thereby heap further pressure on social media stocks. Its stock was down around 5% last week and this week’s trading could further reflect the sombre mood in social media.

Last week’s topsy-turvy market action amongst social media stocks spells danger for Snap, as the company is expected to post an adjusted loss of $0.18 a share on revenue of $251.6 million, according to analysts.

So far this year, Snap shares are down around 13% and could potentially see further declines prior to its Q2 results early next month.

Social media angst

Some analysts have described Facebook’s results as a “bombshell” that reignite worries sparked by its privacy fiasco earlier this year.

In March, Facebook was embroiled in controversy after allegedly allowing obscure political consultancy firm Cambridge Analytica to “harvest” reams of personal data under the guise of academic research from 57 million Facebook account holders.

The revelations weighed on its share price for weeks and led to significant company restructuring including new company policies and privacy measures aimed at appeasing millions of disgruntled users.

Facebook’s Q2 2018 results are the first sign that a new European privacy law, combined with a series of privacy scandals, and other app developers – were all adding up to erode the company’s business performance.

During a scheduled call with market analysts, even Facebook talisman and CEO Mark Zuckerberg said that that “we’re investing so much in security that it will significantly impact our profitability.”

Facebook also warned that the toll would not be offset by revenue growth from emerging markets and Instagram, which has been less affected by privacy concerns.

Australian social media

Closer to home in Australia, social media company Hearmeout (ASX: HMO) is also struggling and has been placed on “care and maintenance” because of poor results and meagre user numbers.

Hearmeout has created a “voiced-based social media platform” and is aiming to integrate the technology into cars and improve the driving experience for car drivers.

The platform enables users to share and listen to 42-second audio posts through the platform’s native feeder on other social net-works, such as Twitter or Facebook. Through this app, people can express their authentic voice and put their unique signature on social media interactions.

In February this year, Hearmeout’s relationship with Ford Motor Company expanded into India, with its platform now available to Ford customers using the SYNC in-car entertainment technology. The Indian market expansion is supplementary to Hearmeout’s platform already being enabled in Ford cars made in the US, UK and Ireland.

Despite all its efforts, the company has encountered difficulties and has cleared out non-essential staff in a bid to slash costs by US$200,000 per month.

Social media connectivity for cars is a great idea, but making it commercially viable is quite another matter.

Social media landscape in flux

Facebook and Twitter have potentially reached a stage of full resource allocation whereby the average cost of acquiring a new user is higher than average revenue per user.

This means social media companies must find cheaper ways of finding new users or monetise existing users to a greater degree than before.

The latter option is risky as evidenced by the embarrassing privacy policy fiasco in March, while the former option, is becoming increasingly difficult to deliver with consumers becoming increasingly “ad-averse” amongst other important factors such as high social media saturation and competition from other platforms in other countries.

Social media competition is hotting up, especially in populous countries such as China where there is both more spare capacity and more potential users of social media, compared to the US.

Social media companies are coming to terms with the fact that their ability to monetise their respective platforms is gradually being eroded. This could mean their overarching valuations may quite possibly have overshot their fundamental valuations.

With two primetime bellwethers such as Facebook and Twitter reporting slowing growth figures, attention now turns to the other powerhouses such as LinkedIn and Snapchat, not to mention the results from foreign platforms such as Russia’s VKontakte and China’s WeChat.

Their respective figures will add weight to the argument that social media companies are reaching a consolidation phase, or alternatively, could indicate that last week’s poor results are merely a short-lived blip on an otherwise rosy long-term outlook for social media commercial viability.

Possibly the worst-case scenario is that social media companies may have to go through significant changes to remain competitive, including potential mergers to consolidate existing platforms.

The best-case scenario is that social media companies will have to get used to growing at smaller multiples as they were once used to.