Facebook shaming masks an incredibly valuable business
Facebook critics have had a field day with privacy, misinformation and hacking concerns. Shareholders are suffering. But users still value the service, a lot.
That is the conclusion from a new academic study reported by Ars Technica. Researchers found actual Facebook users consistently valued access to the social media website at more than $1,000 annually.
It is an opportunity for investors, eventually.
The study is a mashup of disciplines. Academics Jay Corrigan, Matthew Rousu, Sean Cash and Saleem Alhabash combined their expertise in economics, consumer behavior and the study of social media to determine the value of Facebook access.
The process was complex. Facebook is free to use. Instead of asking what users would be willing to pay for use, the researchers flipped the equation. They asked how much users would demand to give up Facebook. Then they set up an auction mechanism to find that value.
The results were astonishing. According to Ars:
- The annual range for college students was between $1,511 and $1,908.
- In the Midwest, students wanted an average of $2,076.
- Adults demanded $1,139.
- And an online auction for adults set the threshold at $1,921 to give up Facebook.
The numbers show how deeply social media is interwoven into our culture. It is how people connect. It is how businesses reach out to customers and employees.
The authors concluded that, while it may be difficult to measure the economic impact of social media, the benefits Facebook brings to its users is large.
It is easy to forget this. The company has been consistently under attack since the 2016 presidential election. Longtime critics blame the company for the election of Donald Trump. They point to Russian trolls, misinformation campaigns and Cambridge Analytica, the data analytics firm that scraped Facebook user data.
Related post: Why Facebook critics are missing the point
More recently, Apple (AAPL) CEO Tim Cook launched pointed attacks at the social media giant for what he called surveillance. Given the cozy relationship between the iPhone and communist China, the comments were wildly hypocritical. However, in the court of public opinion, the damage was swift. Public opinion about Facebook imploded. The stock price lost a third of its value.
Personally, I think carpet-bombing your staunchest ally is a dumb strategy. People buy iPhones to access Facebook properties.
TechCrunch reported in July 2018 that Facebook, Messenger, Instagram and WhatsApp took four of the top 5 spots for all-time app downloads, according to App Annie, a data analytics firm for mobile applications.
Unfortunately for Facebook stakeholders, metrics like downloads have fallen from favor. Investors are currently more interested in what negative opinion-writers and Tim Cook have to say. Their gloom about hacking and privacy weighs heavily.
Ultimately, share prices are always a function of investor sentiment.
To be fair, Facebook executives have not helped. Mark Zuckerberg, chief executive officer and Sheryl Sandberg, chief operating officer, have consistently been less than forthcoming about what they knew about data breaches and the sharing of user information.
They are squandering corporate goodwill. However, the underlying business has not changed.
Facebook remains an integral part of online culture. With 2 billion users worldwide, it is social media for most of the world. It’s the glue that binds friends, family and increasingly businesses.
The research published by Corrigan, Rousu, Cash and Alhabash proves that access to these connections has value that is both measurable and not easily duplicated.
And although that value alone is not reason to buy Facebook shares, the study does undermine the notion that large numbers of Facebook users are likely to dump the service.
All things being equal, it is only a matter of time before the negative sentiment — which is driving prices lower today — shifts to neutral.
The market capitalization of Facebook stock has plummeted to $379 billion. Shares currently trade at 17.6x forward earnings. This may seem expensive. But keep in mind that sales grew from $7.8 billion in fiscal 2013 to $40.6 billion during 2017. During the most recent fiscal year, revenues exploded 47% higher. Profits grew 56%.
Facebook is not a dying business. It is simply one that is out-of-favor with investors … for now.
Jon D. Markman