In a Million Dollar Nutshell ? Only The Marketers Matter ?
Analysing Facebook can’t lead to a differentiated investment thesis because it’s too noisy to predict profits and too many people are trying. However, Facebook is a good business to hold in a diversified portfolio. You should be happy to have it in your index fund. Facebook’s database of user info is the world’s greatest competitive advantage and the company compounds its own earnings exceptionally well by reinvesting them. The safe cash pile and debt-lessness qualifies enterprising investors to dig deep into Facebook.
Here’s Comes Everything You Need to Know About Zuck’s Stock!Disclaimer: I do not own Facebook (FB) at the time of writing. Disclaimer: chrismorrissey.money does not provide financial advice. All content is purely informational. Consult independent advice.
It was an ordeal owning Facebook shares in 2017/18, having dropped 27% from its highs. However, for some of us that was a blessing because we love it when stocks go down. It allows us to buy quality, lasting businesses for less. So, no matter how you feel personally about what Facebook get up to, only the economics, not the emotions of the stock, are going to serve us when it comes to investing. Let’s take a closer look at what sector and industry group Facebook slot into.
Communication Services Sector
We all know what Facebook is and how it helps you. You get to chat to your friends on it. You can connect with people, and that’s communication. On paper, Facebook is not a tech firm. It belongs to the communication services sector. There’s a telecommunications industry group too in this sector which provides the physical architecture to host Facebook, fibre-optics for example, but you also have the entertainment side. Entertainment is an industry group that Facebook is a part of. Facebook host every entertainment and communications service, merging them all together
The Facebook Saga So Far ?
Even if you’re not on Facebook, you probably know someone who is. Mark Zuckerberg started the website at Harvard, for Harvard, but it grew beyond college campuses and was taken public in 2012 at $36 per share. In April 2013, data breaches scared away a lot of investors but the firm weathered backlash. In October 2014, it acquired WhatsApp and continued developing the website. The stock glided upwards until March, 2018, when data breaches again spooked investors . That was compounded by events in July 2018, when they lost an enormous 19% off their stock price after reporting disappointing sales. In actual fact, two things events were completely separate and that’s where the opportunity to buy Facebook came from. That was also the biggest loss of market capitalisation of one company ever, something else that’s clear to us in hindsight!
Facebook’s Doesn’t Sell Your Data ?98% of revenue for Facebook is made from hosting ads .
Scrolling through your news feed, you’ll be greeted by companies trying to sell you things. That’s how Facebook makes it’s money. Forget the other 2% of Facebook’s revenue. Facebook does not sell your information. they use it to allow marketer’s to have a more targeted ad campaign . Your information always remains private, even if it’s being used by Facebook to get marketers in touch with you. That’s the Facebook value proposition to marketers, and if that still offends you as a user, I completely understand. However, we’ve got to leave that bias behind as we go from Facebook users to potentially Facebook investors!
Facebook is Fundamentally Strong
Facebook is a secure business. It’s cash rich with practically no debt . It’s core business will still be relevant ten years from now and it can generate good returns on reinvested profits. If you’re new to Facebook, that’s all they do! They don’t issue a dividend to you as a shareholder (putting earnings straight into your bank account), so management’s responsibility is to maintain those decent returns from reinvesting the earnings. That return on invested capital/return on equity continues to make reinvestment in growth cheaper, supporting a higher and higher stock price for investors.
Super Sticky Platform ?
In most developed regions of the word, social media is used on a daily basis. As a result, daily active users (DAU) is important metric to track. The number of daily active users is a relevant for measuring Facebook’s popularity . The figure stands around 1.4 billion. Yes, that’s 1.4 billion people logging onto Facebook every single day. However, we need to pause for a minute because when you look into the Facebook small print, they say that up to 15% of of accounts are either false, fake, or nefarious. So we have to scale back that 1.4 billion figure to what’s actually relevant as real marketer value, around 1.2 billion daily active users. The same adjustment made to Facebook’s monthly active users gives us 2 billion.
But remember, these numbers make no difference to marketers who won’t be willing to give Facebook any ad spend if people are just visiting the site and never returning. Those marketers want a sense of customer lifetime value from the Facebook audience who view their ads. Every new friend you add on Facebook builds higher the barrier for you to leave Facebook, so the ratio over time between daily active users and monthly active users will reveal how well Facebook can retain users. It’s equally a measure of how well they can get users to engage with the site and with each other, a real stickiness factor. The quarterly average revenue per user, ARPA, is another useful worldwide average.
Why Did Facebook Stock Fall So Far ?
Facebook stock has fallen because the company is not growing these numbers in line with investors expectations . When you buy Facebook stock at $200, you’re paying for the future. Investors feel a future worth paying $200 dollars for will have growth rates that they think are unlikely to come.
Naturally, growth rates do slow down as revenue, or your user base, gets bigger and bigger. That’s growing pains. Facebook in its recent conference calls has referenced this, saying it’s getting to the point with its user base numbers where the firm is starting to mature. Zuckerberg also warned of tightened operating margins and because of all of this, Facebook investors have run away over the past year. Our job is to see if this pessimism has been warranted or has been overdone, so let’s explore the arguments for and against Facebook’s future and you can make your own judgment.
The Facebook Downside ?
Top of the list of reasons for investors to feel iffy about Facebook is regulation . It would be foolish to rule out the possibility of government authorities restricting social media companies’ ability to sell advertising, or breaking up Facebook in general. European General Data Protection has made an impact on Facebook’s profitabillity, and what’s more is that Facebook rely on advertising for virtually all of its revenue.
Another key point is of course its brand damage following the privacy leaks. Facebook gets more media coverage than arguably any other company and negative publicity is surely going to damage brand engagement and loyalty.
Let’s not forget the ad blockers, cybersecurity threats , and of course the 15% of nefarious accounts. Any further erosion of confidence is going to push some more of its user base to substitute products belonging to rivals like Snap and Twitter. This is because physical switching costs are virtually non-existent in a practical sense.
An arguably ageing user base is also a concern, paired with growing negative consumer sentiment especially amongst parents about the potential health dangers of excessive social media and online use. That applies industry and sector wide, rather than Facebook specific, but investors still take issue with the fact that Mr Zuckerberg controls all of the voting rights on Facebook shares. He is a more entrepreneurially minded CEO, who’s recently taken into his own hands the dismissal of the WhatsApp and Instagram founders. For better or for worse, this has led to some shareholders not really feeling like they’re owners of this business.
The Facebook Upside ?
WhatsApp isn’t fully monetised yet, nor is Facebook Marketplace . Zuckerberg’s management can apply their know-how freely to those apps, getting them to contribute more to the bottom line. On top of this, by buying with WhatsApp and Instagram, Facebook has eased the competitive rivalry within the social media space, and established itself as the strongest player.
Facebook also has incredible targeting tools and plenty of data from all of us which can’t be undervalued. Facebook could not be more integrated either, think of how Tinder and Bumble rely on Facebook and you’ll realise the many more apps that need Facebook in good health . There’s also plenty of people left in the developing world who can still get Facebook accounts, albeit from less lucrative regions.
Facebook’s main website represents the world’s greatest competitive advantage. Who’s going to build another database like that? But it needs to be managed properly. There are too many unanswerable questions when it comes to this stock, including severe will regulation will be, how Facebook’s brand will fare over the long-term, and whether marketers will continue to spend big on ads.