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Facebook Revamps News Feed to Bring More Relevant Content

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Facebook Inc. (FB - Free Report) announced that it is currently working on an algorithm to prioritize posts made by friends and family on News Feed. Public contents such as the ones made by businesses, brands and media will have less priority, adds CEO Mark Zuckerberg in a blog post.

Although Zuckerberg expects this change to have a negative impact on “the time people spend on Facebook and some measures of engagement” but will help people engage in “more meaningful social interactions”. Notably, this is what the company prioritizes now.

Moreover, last month, the company revealed that “engagement bait” posts that forcibly seek an individual’s attention by provoking them to like, share or comment will be demoted.

Facebook’s initiatives go on to show its new objective which in Zuckerberg’s own words during the last earnings call are — “Protecting our community is more important than maximizing our profits”.

Notably, Facebook has gained 48.2% in the past year, substantially outperforming the industry’s 25.7% rally.

Impact on the Platform

Facebook continues to be the largest social service platform with over 2 billion monthly active users (MAUs). The company’s consistently expanding user base remains one of its biggest growth catalysts.

Facebook’s initiatives to declutter News Feed, which is the first thing the user views after logging in to the platform, will help drive user satisfaction. The steps are in sync with the company’s strategy to improve the time “well spent” on the platform even if that means compromising with the total time spent on the platform.

We note that Facebook has witnessed significant traction online and mobile advertising spending in a short span of time. Advertisers prefer Facebook given the huge user base and the multiple ad products that the company offers.

Per a recent survey by investment firm Cowen, Facebook surpassed TV and Alphabet’s (GOOGL - Free Report) YouTube to be the most preferred medium for digital advertisements. Analysts at Cowen believe Facebook will emerge as the digital ad leader, replacing Google, given the growing popularity of video advertisements and its photo-sharing application, Instagram.

However, analysts fear that the company’s latest strategy to demote posts made by brands and publishers will have a negative impact on advertising revenues, which is the mainstay of its revenues.

Since the past few quarters, the company has maintained that ad revenues will continue to grow but will face tougher year-over-year comparisons. Ad load, which has been a leading factor in driving ad revenues, will cease to be so in the coming quarters. Consequently, ad revenue rates are also anticipated to “come down meaningfully”.

Zacks Rank & Other Stocks to Consider

Facebook carries a Zacks Rank #2 (Buy).

Some of the other top-ranked stocks in the broader technology sector are NetApp Inc. (NTAP - Free Report) and NVIDIA Corporation (NVDA - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for NetApp and NVIDIA is projected to be 11.3% and 10.3%, respectively.

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