Facebook Spends $6bn to Consolidate 2016, With Innovations in the Pipeline

Facebook's past 12 months - imgs: BloombergBuzzfeed
Facebook shares jumped four points yesterday after the company announced a $6bn buyback, which will involve the purchasing of shares from existing investors at market price. It's a standard move used to keep cash in the pockets of shareholders whose equity is in a bit of a pickle. But is the move enough to spare the company a dampened end to what has been, overall, a rather good 2016? And what's more, how can Facebook save itself from its present trepidations?

Until late October, the company was having a steady year on the market. The big surge in late January followed the announcement of $5.8bn revenues for the prior quarter; 50% above normal levels. So what do you do with all that cash? Well, aside from acquiring bits and pieces this year, it seems Facebook has been saving it for a rainy day - which, ironically, came in the form of shares hitting an all-time high at 133.50 last month. Since then, as could be anticipated, things have slipped 12% amid speculation that it was the end of a promising period of growth. 

As investment analyst Richard Windsor told IBD News, 'It is a sign that the company does not know how to invest the money that it has generated...so it decides to return the money to [the shareholders] instead...This is a classic move that all companies make when they begin to transition from rapid growth into middle age.' 

The past few weeks have indeed been pretty rough. On 2 November, Facebook announced its growth would be slowing; and it's still embroiled in the 'fake news' controversy that began on 9 November which has rapidly grown from a non-issue into a full-blown political crisis. Perhaps more importantly, however, Facebook doesn't yet have the solid innovations needed to keeping investors happy as they look to the future. As general growth slows, other avenues need to be opened-up in order to help Facebook expand. But although things are in the pipeline, they haven't yet taken root fully. 
Facebook rolled out live streaming a while ago, but has been expanding its advertising in the UK over the past few weeks. It's also announced plans to expand operations in Britain by employing 500 new staff in a new London HQ over the coming year, suggesting plans to have growth rolling again in 2017. However, although it's making inroads into the controversial FreeBasics internet provision project (for countries with little internet infrastructure), some snags have emerged with the Aquila drone, which crashed during its first test flight in Arizona in June.

So, whilst innovations do look promising for the creation of future growth, Facebook has needed to stop the slide which is currently ensuing in order to satisfy investors in the short term.  
Still, if this really is the start of Facebook's 'middle age', perhaps we should look back over the past almost-five years and appreciate what a great performance we've seen since Facebook first went public in May 2012.

Get a load of that three year growth! - img: Bloomberg

For now, a buyback is one of various attempts to salvage the year for Facebook. Although it should be enough to cap-off a decent 2016, things need to get rolling sharpish on the various technologies which are either in the pipeline or still to reach their full potential; otherwise, stagnation could become a real problem.

Still, I'd rather be in Mark Zuckerberg's loafers than those of Jack Dorsey in the Twitter tree today, where fairly shaky buyout rumours seem to have been the biggest factors driving shares upward for the past couple of months.

Twitter looked like it match Facebook's growth rate...until it reached a cliff in October - img: Bloomberg

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