How investors should react to Facebook’s revamped news feed

Looking into Facebook.
Looking into Facebook.
Image: Reuters/Dado Ruvic
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Facebook has said it will change the news feed algorithm to prioritize meaningful content, increasing content from family and friends and content that creates discussion. But what will that mean for Facebook’s financials?

CEO Mark Zuckerberg said that the changes will reduce engagement. That means the changes will reduce time spent. And time spent has been a key metric for measuring Facebook’s performance. For instance, you’ve been able to measure Facebook’s revenue by multiplying the number of users by the time spent by the value of time.

Facebook conveniently dropped this bombshell of a business-model change during its “quiet period”—the period between the end of the quarter and their earnings release when it is prohibited from having discussions with investors or analysts. So we won’t know how Facebook thinks investors should change their expectations until its earnings announcement on January 31. And it’s unlikely that Wall Street analysts will change their estimates until they get more clarity.  If Facebook is shifting its target from time spent to meaningful interactions, investors should probably change their models—but we won’t know by how much for more than two weeks.

Why did Facebook announce this now? We have three ideas:

  1. Announcing now reduces investor’s expectations for the earnings announcement and potentially reduces the downside reaction when the company reduces forward guidance. The stock dropped 4% yesterday, reflecting lower expectations already.
  2. A big change in business model can be hard to digest. And announcing now gives Wall Street time to think for a few weeks before they have to update their models after earnings are announced.
  3. Facebook may be trying to dampen expectations for last quarter’s results. Zuckerberg said that Facebook started its changes late last year which implies that engagement in the fourth quarter could have been lower than people expected.

Of course, this, too, is speculation. So while we can watch our news feeds to see what changes are made, we won’t know how to think about Facebook’s future until management starts talking again. Twelve trading days may not seem that long. But it certainly is a long time to have such a big question mark hanging over the fifth-largest company in the world.