Case Study: Facebook

Facebook began 2018 as one of the hottest tech stocks to buy. Less than six years after a $38 IPO, some investors thought Facebook could climb as high as $230 per share. However, on the final trading day of 2018, Facebook closed at $131.09 per share, down 25.7 percent for the year.

Behind Wall Street’s optimism, there were worries over signs of fewer young people using the platform. Along with demographic challenges, Facebook continued to address criticisms over its role as a platform for the spread of fake news.

How can Facebook overcome privacy and profitability issues? Will the company grow into a sustainable innovation, or end up being a modest media disruption?

Timeline

2004

Borrowing designs and programs from existing sites such as Friendster, Mark Zuckerberg launched Facebook on Feb. 4, 2004 from his dorm room at Harvard. Word spread rapidly around campus about the new social networking site, which Zuckerberg described as a service that would help students “connect” with their friends and keep abreast of what they were doing. Within twenty-four hours, more than 1,200 Harvard students had registered; within one month, more than half of all students were part of it. Zuckerberg and a handful of dorm mates and friends began offering the service to other Ivy League schools and Boston-area universities.

 

In the summer of that year, Zuckerberg left school and set up his headquarters in a ranch house in Palo Alto. Peter Thiel, co-founder of PayPal, joined the board of advisers and became an initial investor, contributing $500,000 for a 10-percent ownership in the young company.

2005

In May, Accel Partners, made a $12.7 million investment. By autumn, Facebook had more than five million users, with more than 85 percent of college students connected to the network. Next, Facebook targeted high school students. By the end of 2005, Facebook was active in more than 2,000 colleges and 25,000 high schools.

2006

In April, Facebook received another round of funding from investors, including Accel, Thiel, Greylock Partners and Meritech. It raised $27.5 million and was valued at $500 million. By September, Facebook was opened to everyone over 13 years old with a valid e-mail address.

2007

In October, Microsoft bought a 1.6 percent stake in the Facebook that implied a fifteen billion dollar value for the three-year-old social networking site.

2008

Zuckerberg hired Sheryl Sandberg, a Google advertising executive, as COO. After holding a number of brainstorming sessions with Facebook employees, she concluded that advertising should be the main source of revenue for Facebook and began working on building a sales structure.

2012

In April, Facebook purchased Instagram, a mobile photo sharing app, for $1 billion in cash and stock. By May, it filed for an initial public offering (IPO) of its stock. Demand for the stock was high, and underwriters priced shares at thirty-eight dollars each, giving the company a valuation of $104 billion, the largest of any newly public company yet. However, in what was perhaps an omen of the year to come, a computer glitch on the NASDAQ on the day of the IPO, May 18, delayed trading. Facebook stock struggled all day to stay above the opening price.

Over the coming months, the stock fell as low as eighteen dollars a share before beginning to rebound. In October, Facebook hit a milestone with 1 billion active users.

2014

In February, Facebook bought WhatsApp, an encrypted mobile messaging app, for $19 billion. Two years after its debut, Facebook’s stock was trading around sixty-two dollars a share. Both its founder and investors were once again optimistic.

2016

Shortly after the 2016 presidential election, Zuckerberg dismissed the “crazy” idea that his platform influenced the outcome by aggravating the issue of fake news.

2017

By February, Facebook’s stock price had doubled to $137 a share. In 2017, it was the sixth largest company in the world in terms of its stock market valuation, exceeded only by Apple, Alphabet, Google, Microsoft, Berkshire Hathaway and Amazon. In July, the company reached two billion active users.

In September 2017, a bombshell report revealed the social network received $100,000 to publish Kremlin-linked ads on its site. Less than two weeks later, Zuckerberg backpedaled, expressing regret over his “dismissive” remarks.

2018

Facebook began 2018 as one of the hottest tech stocks to buy. Less than six years after a $38 IPO, some investors thought Facebook could climb as high as $230 per share. Behind Wall Street’s optimism, there were worries over signs of fewer young people using the platform.

Along with demographic challenges, Facebook continued to address criticisms over its role as a platform for the spread of fake news. The social media giant’s solution was to revise its NewsFeed, which accounts for 85 percent of sales. But there was a noticeable consequence of the change. Studies showed users were spending five percent less time on the site.

Making matters worse, the company faced severe criticism in March when The New York Times and The Guardian reported 50 million users’ personal data was harvested and targeted by Cambridge Analytica, a political firm. The UK fined Facebook £500,000 pounds for failing to protect user data.

While Facebook did not experience a revenue hit immediately following the Cambridge Analytica scandal, Q3 numbers continued to show a decline in user growth rate from 11 percent to nine percent. On the final trading day of 2018 Facebook closed at $131.09 per share, down 25.7 percent for the year.

Want more background on what differentiates Zuckerberg from other entrepreneurs? What made Zuckerberg’s idea so profitable compared to other entrepreneur’s ideas? For more information on this, refer to pg. 19-21 of The Strategic Digital Media Entrepreneur

Supplemental Content:

Here Are All the Reasons It’s a Bad Idea to Let a Few Tech Companies Monopolize Our Data (March 2018)

https://hbr.org/2018/03/here-are-all-the-reasons-its-a-bad-idea-to-let-a-few-tech-companies-monopolize-our-data

Sources for Facebook Timeline:

Timeline: Where Facebook got its funding: http://fortune.com/2011/01/11/timeline-where-facebook-got-its-funding/

Who owns Facebook and when was it created?  http://www.telegraph.co.uk/technology/0/owns-facebook-created/

Facebook buys WhatsApp for $19 billion  http://money.cnn.com/2014/02/19/technology/social/facebook-whatsapp/index.html

Facebook Buys Instagram For $1 Billion  https://techcrunch.com/2012/04/09/facebook-to-acquire-instagram-for-1-billion/

Facebook hits 1 billion active user milestone  https://www.cnet.com/news/facebook-hits-1-billion-active-user-milestone/

Facebook hits 2 billion monthly users  http://money.cnn.com/2017/06/27/technology/facebook-2-billion-users/index.html

Zuckerberg: the idea that fake news on Facebook influenced the election is ‘crazy’ https://www.theverge.com/2016/11/10/13594558/mark-zuckerberg-election-fake-news-trump

Russian firm tied to pro-Kremlin propaganda advertised on Facebook during election

https://www.washingtonpost.com/politics/facebook-says-it-sold-political-ads-to-russian-company-during-2016-election/2017/09/06/32f01fd2-931e-11e7-89fa-bb822a46da5b_story.html

Zuckerberg admits he should have taken Facebook fake news and the election more seriously: ‘Calling that crazy was dismissive and I regret it’

https://www.recode.net/2017/9/27/16376502/mark-zuckerberg-facebook-donald-trump-fake-news

Facebook is the best tech stock to own in 2018

https://www.thestreet.com/story/14440787/1/facebook-could-soar-nearly-25-perfect-above-230.html

Facebook earnings: How will news feed changes impact revenue?

https://www.marketwatch.com/story/facebook-earnings-how-will-news-feed-changes-impact-revenue-2018-01-26

Facebook’s Profit Rises, but Users Spend Less Time on Network

https://www.wsj.com/articles/facebook-posts-61-rise-in-operating-profit-in-the-fourth-quarter-1517434065

Facebook Losing Younger Users

https://www.emarketer.com/content/facebook-losing-younger-users-at-even-faster-pace

Facebook-Cambridge Analytica: A timeline of the data hijacking scandal

https://www.cnbc.com/2018/04/10/facebook-cambridge-analytica-a-timeline-of-the-data-hijacking-scandal.html

Zuckerberg Apology

https://www.facebook.com/zuck/posts/10104712037900071

4A’s Accelerate: Industry Talks #WhatIf, Harassment and ‘Frenemies’

http://adage.com/article/agency-news/4a-s-conference-industry-talks-whatif-harassment-frenemies/313078/

Hard Questions: What Data Does Facebook Collect When I’m Not Using Facebook, and Why?

Facebook earnings beat despite backlash, shares surge

https://www.marketwatch.com/story/facebook-earnings-beat-estimates-amid-data-privacy-concerns-2018-04-25

Facebook suspends 200 apps following Cambridge Analytica scandal

https://www.washingtonpost.com/news/the-switch/wp/2018/05/14/facebook-suspends-200-apps-following-cambridge-analytica-scandal/

UK fines Facebook £500,000 for failure to protect user privacy

https://www.theguardian.com/technology/2018/oct/25/facebook-fined-uk-privacy-access-user-data-cambridge-analytica

Facebook growth slows as Zuckerberg says developed countries are saturated

https://www.theguardian.com/technology/2018/oct/30/facebook-quarterly-report-revenue-growth

How Facebook’s scandals affected the stocks

https://www.cnbc.com/2018/12/31/how-facebooks-stocked-fared-through-privacy-scandals-in-2018.html