Facebook's Algorithm Changes Could Boost Ad Prices, Says William Blair

Facebook, Inc. FB shares have experienced uncertainty over the past week after announcements of changes to the platform's news feed algorithm. But analysts at William Blair are optimistic that the changes will lead to more efficient advertising in the long run.  

The Analyst

William Blair analyst Ralph Schackart maintained an Outperform rating on Facebook. 

Facebook is set to report fourth-quarter results Wednesday, Jan. 31 after the close. Schackart said he expects Q4 advertising revenue to be "at least in-line" in relation to estimates, with a "bias to the upside." (See the analyst's track record here.) 

Schackart spoke with a large digital ad buyer and a third-party direct response buyer to see how the the recent changes to Facebook’s news feed algorithm — which will prioritize friend content over public content from businesses and brands — could affect ad revenue.

While the recently announced changes to news feed algorithms caused uncertainty in the market, especially regarding the change's effects on ad revenue, a large digital ad buyer with whom Schackart spoke believes ad pricing could possibly go up as much as 25 percent, the analyst said. 

“Less time spent on Facebook (driven by the feed being less cluttered with posts from businesses/brands/media) leads to decreased supply, and thus higher pricing,” Schackart said, recapping the ad buyer’s comments.

The third-party direct response buyer told Schackart that the algorithm change could become favorable for advertisers in two to three quarters, and said the amount of “clutter” will decrease while the amount of relevant ads stays the same, according to William Blair.

This could lead to a more ideal environment for advertisers even as users are expected to spend less time on the site.  

Price Action

At the time of publication, Facebook shares were up 1.58 percent at $180.40. 

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