The controversial changes have sparked a mass exodus of users to rival platforms. Let’s take a closer look.
What’s up with WhatsApp?
The messaging app is renowned for providing a secure and private service through end-to-end encryption. However, this security is now coming into question. A recent update for WhatsApp announced that users outside the EU will share their data with the Facebook platform.
User response was pretty clear. Almost 25m new users joined a rival messing app — Telegram — within 24 hours of the announcement. It’s unclear how many of these new users came from WhatsApp. But, it has subsequently seen a 17% decline in user downloads during the same week.
Should investors be worried about the Facebook share price?
Facebook originally acquired WhatsApp for $19bn in 2014. To this day, it has struggled to justify the high price paid. Despite efforts, monetising WhatsApp through advertisements has proven difficult. Instead, the company has introduced a business variant of the application that provides unique features that companies pay for.
The stock doesn’t report how much revenue it makes by its separate platforms (Facebook, WhatsApp, and Instagram). As a result it’s difficult to judge just how successful this approach has been.
Analysts at Forbes have estimated that WhatsApp is generating approximately $4 of annual revenue per user. Assuming that all 25m new Telegram users came from WhatsApp, this would indicate a revenue loss of around $100m.
Sounds like a lot until it’s compared against Facebook’s forecasted total revenue of $84bn for 2020. In other words, a potential revenue decline of -0.11%.
Therefore, if I were a shareholder, I wouldn’t be concerned with the latest Facebook share price movements.
What is the real threat to Facebook’s business?
The decline in WhatsApp users doesn’t pose a severe financial threat in my eyes. However, there is no denying that Facebook’s reputation for handling user data is hardly pristine. And in my opinion, reputational damage is the real danger.
In 2018, CEO Mark Zuckerberg testified before the US Congress after discovering that the research firm, Cambridge Analytica, gained access to millions of Facebook users’ personal data through shady applications.
Since then, talks of regulation have continued to rise in popularity as trust between the general public and Facebook has begun to wither. And as recent events have shown, when users lose trust, they switch to a competitor’s platforms. If this user loss spreads to Facebook’s other platforms, then there could be serious trouble ahead.
Nearly 99% of Facebook’s revenue comes from selling advertisements. And as an advertising platform, Facebook’s value is diminished with each lost user.
In the end, if Facebook can’t provide advertisers with a wide audience, they will simply spend their budgets elsewhere. I think this could have serious long-term consequences for the Facebook share price.
Zaven Boyrazian does not own shares in Facebook. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Facebook. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.