FB - Facebook

[JayGatsby]

Based on the small portion of the universe I'm facebook friends with there's a distinct and rapid decline in original content sharing. Is no one else seeing that? There's been a few articles to that effect (http://www.bloomberg.com/news/articles/2016-04-07/facebook-said-to-face-decline-in-people-posting-personal-content). FB tells you # of users like it's a traditional subscription media company, but doesn't give anything on true volume (other than on the videos that start automatically). So if ARPU is increasing, but underlying volume is decreasing doesn't that cap growth?

[ZenaidaMacroura]

Based on the small portion of the universe I'm facebook friends with there's a distinct and rapid decline in original content sharing. Is no one else seeing that? There's been a few articles to that effect (http://www.bloomberg.com/news/articles/2016-04-07/facebook-said-to-face-decline-in-people-posting-personal-content). FB tells you # of users like it's a traditional subscription media company, but doesn't give anything on true volume (other than on the videos that start automatically). So if ARPU is increasing, but underlying volume is decreasing doesn't that cap growth?

I actually don't think that's a problem -as long as people are engaging with the content being posted?  Everyone seems to love weighing in on that medium.

 

And ultimately I think facebook could nudge people to post more personal content if they wanted... (decrease the rate at which people see news versus personal content on their feed, etc)

[fareastwarriors]

FB... I did not expect this to get so big and successful. I remembered I was cheering when the price went below its IPO price...

 

[Jurgis]

FB... I did not expect this to get so big and successful. I remembered I was cheering when the price went below its IPO price...

 

Got shares in IPO, sold on the first day when it breached IPO price, patted myself on the back when it went below IPO price, never bought. Oh well. Still, I'd rank this one as one of my smaller sins of omission.  ::)  8)

[giofranchi]

I have opened a very small position in FB.

I still see lots of growth ahead: imo FB users will continue to grow and advertisers will keep growing even faster, also FB will probably start monetizing Messenger, WhatsApp, and Oculus Rift soon.

It is a wonderful company run by Zuckerberg who has by now proven himself as an outstanding technology visionary and a great capital allocator too.

Just like IBB, NKE, and SBUX, FB is another investment I’ll gladly make larger during any pullback.

 

PS

Andrew Left seems to be shorting the stock:

 

http://seekingalpha.com/article/3994102-notable-analyst-right-short-facebook

 

Last time I was long a stock Left was shorting it ended very badly… We’ll see!

 

Cheers,

 

Gio

[glorysk87]

Interesting Gio. I agree with your main points, but I'm finally starting to think about exiting my position. I bought late last September, and I'm getting the point where it's difficult to defend the name on valuation.  Qualitatively, I think it's a fantastic company. But on valuation it's getting more and more difficult to hold.

 

I'm curious what your estimate of upside is.  My optimistic scenario had them earning $7.00 at peak earnings.  Unless they can capture more of a their users' time and attention than they do currently, I couldn't model them earning much more than that.  Based on that peak earnings estimate, the valuation becomes pretty tough to defend at a ~$350mm market cap.

[giofranchi]

I'm curious what your estimate of upside is.  My optimistic scenario had them earning $7.00 at peak earnings.  Unless they can capture more of a their users' time and attention than they do currently, I couldn't model them earning much more than that.  Based on that peak earnings estimate, the valuation becomes pretty tough to defend at a ~$350mm market cap.

 

Of course FB valuation makes sense only if it keeps growing. Because of the huge network effects it enjoys (the larger the number of users, the more new users will be drawn in), I think its users might still grow quickly for some time. And what about all those other technologies Zuckerberg has bought? How much will they grow? And those $23 billion in cash? How successfully will Zuckerberg use them?

Answer: I really don’t know. But I believe Zuckerberg has by now proven to be among the most prescient technology and business leaders in the world and will probably go on making smart moves for a very long time.

This being said, the position I have opened is small, and here is what I intend to do:

a) FB’s growth remains strong and its stock price keeps rising: I’ll keep buying small amounts when I have some cash.

b) FB’s growth slows down materially: I’ll admit I was wrong, and sell out at a loss (which will be very small).

c) FB’s growth remains strong and its stock price falls in a general market decline: I’ll add aggressively.

 

Cheers,

 

Gio

[glorysk87]

Of course FB valuation makes sense only if it keeps growing. Because of the huge network effects it enjoys (the larger the number of users, the more new users will be drawn in), I think its users might still grow quickly for some time. And what about all those other technologies Zuckerberg has bought? How much will they grow? And those $23 billion in cash? How successfully will Zuckerberg use them?

Answer: I really don’t know. But I believe Zuckerberg has by now proven to be among the most prescient technology and business leaders in the world and will probably go on making smart moves for a very long time.

This being said, the position I have opened is small, and here is what I intend to do:

a) FB’s growth remains strong and its stock price keeps rising: I’ll keep buying small amounts when I have some cash.

b) FB’s growth slows down materially: I’ll admit I was wrong, and sell out at a loss (which will be very small).

c) FB’s growth remains strong and its stock price falls in a general market decline: I’ll add aggressively.

 

Cheers,

 

Gio

 

Yea I understand all of that, and I agree with the qualitative aspects of your analysis.  I have IG, WhatsApp, Messenger, and Oculus all included in my analysis. I still only get to somewhere around $7.00 of EPS at the peak.  Growth is all well and good, but no company can grow above the market forever. That's where I'm running into trouble. I've continued to hold my FB position due to my faith in Zuckerberg and his team. But it's getting more and more difficult to defend.  The assumptions I have to make to justify the current valuation are pretty wild.

[giofranchi]

Yea I understand all of that, and I agree with the qualitative aspects of your analysis.  I have IG, WhatsApp, Messenger, and Oculus all included in my analysis. I still only get to somewhere around $7.00 of EPS at the peak.  Growth is all well and good, but no company can grow above the market forever. That's where I'm running into trouble. I've continued to hold my FB position due to my faith in Zuckerberg and his team. But it's getting more and more difficult to defend.  The assumptions I have to make to justify the current valuation are pretty wild.

 

How many users do you think FB will have when it reaches peak earnings? How many years from now? How large a market will VR be? Which new technologies will Zuckerberg invest in with $23 billion of cash and counting? How much will those new technologies grow?

 

I clearly agree that no company grows faster than the market forever. But FB is a very young company, just like Zuckerberg is a very young founder/CEO. I don’t see the risk of FB becoming too bureaucratic and slow, nor the risk that Zuckerberg might grow complacent any time soon. And certainly he won’t retire for the foreseeable future. The only thing that might dampen FB’s growth is its sheer size. But size is always relative, and FB’s market is potentially huge.

 

I know all this is still just qualitative and I am sorry I cannot come up with a number to be compared with your estimated peak EPS.

 

Cheers,

 

Gio

[frommi]

I'm curious what your estimate of upside is.  My optimistic scenario had them earning $7.00 at peak earnings.  Unless they can capture more of a their users' time and attention than they do currently, I couldn't model them earning much more than that.  Based on that peak earnings estimate, the valuation becomes pretty tough to defend at a ~$350mm market cap.

 

Of course FB valuation makes sense only if it keeps growing. Because of the huge network effects it enjoys (the larger the number of users, the more new users will be drawn in), I think its users might still grow quickly for some time. And what about all those other technologies Zuckerberg has bought? How much will they grow? And those $23 billion in cash? How successfully will Zuckerberg use them?

Answer: I really don’t know. But I believe Zuckerberg has by now proven to be among the most prescient technology and business leaders in the world and will probably go on making smart moves for a very long time.

This being said, the position I have opened is small, and here is what I intend to do:

a) FB’s growth remains strong and its stock price keeps rising: I’ll keep buying small amounts when I have some cash.

b) FB’s growth slows down materially: I’ll admit I was wrong, and sell out at a loss (which will be very small).

c) FB’s growth remains strong and its stock price falls in a general market decline: I’ll add aggressively.

 

Cheers,

 

Gio

 

I think you are overestimating Zuckerberg. For me this is a rich kid throwing money at everything he likes, without looking at price paid. Thats the opposite of the guy that i want to run my business. While FB itself is a nice business, capital allocation is the weak point here. I can`t see that he bought anything that will throw off a profit anytime soon. Facebook itself is out of style for the young kids already and the facebook generation is getting older and more wary about what happens with their data. I really doubt that Facebook will exist in the current form with the current number of users 10 years from now and can imagine that we are already close to peak earnings here. I will add to my puts on every pop higher, valuation is out of reality when you compare it to Google.

[giofranchi]

I think you are overestimating Zuckerberg. For me this is a rich kid throwing money at everything he likes, without looking at price paid. Thats the opposite of the guy that i want to run my business. While FB itself is a nice business, capital allocation is the weak point here. I can`t see that he bought anything that will throw off a profit anytime soon. Facebook itself is out of style for the young kids already and the facebook generation is getting older and more wary about what happens with their data. I really doubt that Facebook will exist in the current form with the current number of users 10 years from now and can imagine that we are already close to peak earnings here. I will add to my puts on every pop higher, valuation is out of reality when you compare it to Google.

 

Morningstar puts FV at $127. Which are the “out of reality” assumptions you think they are making?

Of course if your judgment about Zuckerberg is so negative, valuation does not matter much.

 

Cheers,

 

Gio

 

[giofranchi]

I will add to my puts on every pop higher, valuation is out of reality when you compare it to Google.

 

Let me ask a question: will you add to your short position even if FB's growth remains strong? Do you think it is so much overvalued?

 

Cheers,

 

Gio

[frommi]

Morningstar puts FV at $127. Which are the “out of reality” assumptions you think they are making?

Of course if your judgment about Zuckerberg is so negative, valuation does not matter much.

 

Cheers,

 

Gio

 

I don`t care about Morningstar, i look at EV/EBITDA and how fast it can grow. The last 3 quarters EBITDA at FB was around 3 billion, so with 12 billion EBITDA, current EV/EBITDA is around 30. GOOG and similar companies that are growing 10-15% are around 15, so FB fair value is around half the current price when you assume it is growing at 10-15%. Since i believe growth will stall next year its true intrinsic value is much lower, but around 70$ is my short target.

[giofranchi]

Since i believe growth will stall next year its true intrinsic value is much lower, but around 70$ is my short target.

 

Ok... I guess we won't have to wait much longer to see! ;)

If you are right, and growth stalls next year, as I have already said, I'll sell my position at a very small loss (even if the share price should actually reach your short target).

 

Cheers,

 

Gio

[TorontoRaptorsFan]

Hi Gio,

 

Your portfolio is starting to resemble a mutual fund. Why do you have so many positions?

[PatientCheetah]

I think you are overestimating Zuckerberg. For me this is a rich kid throwing money at everything he likes, without looking at price paid. Thats the opposite of the guy that i want to run my business. While FB itself is a nice business, capital allocation is the weak point here. I can`t see that he bought anything that will throw off a profit anytime soon. Facebook itself is out of style for the young kids already and the facebook generation is getting older and more wary about what happens with their data. I really doubt that Facebook will exist in the current form with the current number of users 10 years from now and can imagine that we are already close to peak earnings here. I will add to my puts on every pop higher, valuation is out of reality when you compare it to Google.

 

I remember people saying that Zuckerberg is out of his mind when he offered $4bil for snapchat. If snapchat actually accepted, it would have been a slam dunk. Great CEOs are also great strategists, they actively eliminate future threats by either crushing or buying future competitions before their cashflow potential become evident.

[frommi]

I remember people saying that Zuckerberg is out of his mind when he offered $4bil for snapchat. If snapchat actually accepted, it would have been a slam dunk. Great CEOs are also great strategists, they actively eliminate future threats by either crushing or buying future competitions before their cashflow potential become evident.

 

If buying the competition is necessary, what does that tell me about the sustainability of the moat?

[ScottHall]

I remember people saying that Zuckerberg is out of his mind when he offered $4bil for snapchat. If snapchat actually accepted, it would have been a slam dunk. Great CEOs are also great strategists, they actively eliminate future threats by either crushing or buying future competitions before their cashflow potential become evident.

 

If buying the competition is necessary, what does that tell me about the sustainability of the moat?

 

There is a difference between necessary and beneficial.

[giofranchi]

Hi Gio,

 

Your portfolio is starting to resemble a mutual fund. Why do you have so many positions?

 

Given the fact I think of the Malone family of businesses as just one business, my portfolio right now is made of 14 businesses: most would define such portfolio a concentrated one!

 

Among the companies I think are great businesses I don’t hold a strong conviction about which will perform better in the next 5 years. Therefore, I like to own them all.

I might have more conviction about their price (which among them are better bargains right now), and that is reflected in the position sizing I choose.

 

Cheers,

 

Gio

 

[giofranchi]

But size is always relative, and FB’s market is potentially huge.

 

Another reason I think size might not be an unsurmountable obstacle for companies like GOOG and FB is that their revenues right now come from just one market: online advertising.

Not only that market could still grow a lot imo, but GOOG and FB could also become broader technology companies and start generating revenues in other markets. If the GOOG guys and Zuckerberg are good enough to follow in Bezos' footsteps, who has transformed AMZN from an online retailer into a true technology company with AWS.

Of course, if like frommi you believe Zuckerberg is no good, than you also think this transformation will never happen successfully.

 

Cheers,

 

Gio

[Guest ajc]

 

I'm curious what your estimate of upside is.  My optimistic scenario had them earning $7.00 at peak earnings.  Unless they can capture more of a their users' time and attention than they do currently, I couldn't model them earning much more than that.  Based on that peak earnings estimate, the valuation becomes pretty tough to defend at a ~$350mm market cap.

 

Of course FB valuation makes sense only if it keeps growing. Because of the huge network effects it enjoys (the larger the number of users, the more new users will be drawn in), I think its users might still grow quickly for some time. And what about all those other technologies Zuckerberg has bought? How much will they grow? And those $23 billion in cash? How successfully will Zuckerberg use them?

Answer: I really don’t know. But I believe Zuckerberg has by now proven to be among the most prescient technology and business leaders in the world and will probably go on making smart moves for a very long time.

This being said, the position I have opened is small, and here is what I intend to do:

a) FB’s growth remains strong and its stock price keeps rising: I’ll keep buying small amounts when I have some cash.

b) FB’s growth slows down materially: I’ll admit I was wrong, and sell out at a loss (which will be very small).

c) FB’s growth remains strong and its stock price falls in a general market decline: I’ll add aggressively.

 

Cheers,

 

Gio

 

I think you are overestimating Zuckerberg. For me this is a rich kid throwing money at everything he likes, without looking at price paid. Thats the opposite of the guy that i want to run my business. While FB itself is a nice business, capital allocation is the weak point here. I can`t see that he bought anything that will throw off a profit anytime soon. Facebook itself is out of style for the young kids already and the facebook generation is getting older and more wary about what happens with their data. I really doubt that Facebook will exist in the current form with the current number of users 10 years from now and can imagine that we are already close to peak earnings here. I will add to my puts on every pop higher, valuation is out of reality when you compare it to Google.

 

 

According to Credit Suisse, and by giving Instagram a standard asset-light tech profit margin, Instagram will pay for its original purchase price in profit this year alone.

The deep learning/AI department that they bought, run by Yann Lecun, has also already paid for itself by improving the algorithms which focus on improving ad conversion rates.

So, actually Facebook have made purchases that are clearly profitable.

 

Not to mention that Messenger is only starting to be monetized now. WeChat has fewer MAUs and an estimated ARPU of $7. North American and European users (Messenger) are probably worth about at least double, if not triple, your average Chinese user. That's going by Facebook's latest earnings presentation, with 1 or 2 market-specific caveats. Which means Messenger's billion MAUs today have between $14B to $21B of unmonetized annual revenue.

Considering that Whatsapp has even more users, and they paid $22B for it, it also doesn't look overpriced even if you consider the markets it's in and the fact that it likely overlaps with Messenger to a decent extent.

 

Having said all that, I think the price is stretched right now so I only want to buy after the stock gets hit hard ($70 would be excellent!), but intrinsically the company is really great at what it does. They're basically following the Microsoft playbook from back in the day. Their moat isn't their original products, so much as it's their ability to relentlessly copy their competitors (Newsfeed - Twitter, new Instagram - Snapchat, new Messenger - WeChat) in a way that provides existing users with an equal or superior experience without ever having to leave a Facebook platform.

This is Word, Excel, and Internet Explorer all over again, though they're only now beginning to focus on monetization because they've always said they want 1 billion users on a platform before that happens.

 

 

 

[fareastwarriors]

WhatsApp: Let’s chat

 

http://www.ft.com/cms/s/0/ea17605e-4846-11e6-8d68-72e9211e86ab.html#axzz4GJo4UG3m

 

The app acts as an alternative internet hub in many emerging markets — but can it make a profit?

[Deepdive]

http://www.forbes.com/sites/kathleenchaykowski/2016/08/01/instagram-the-50-billion-grand-slam-driving-facebooks-future-the-forbes-cover-story/#57f9acb6278f

 

Everyone thought that Zuckerberg was crazy for buying Instagram for $1bn, but now everyone's eating humble pie. I don't think Instagram would be where it is now without Facebook's resources. Liike look at Microsoft and Yahoo's acquisitions, real synergy exists in the case of Facebook and Instagram. Wonder what's going to happen with Linkedin and Microsoft now.

[fareastwarriors]

Facebook Says It Gave Advertisers Inflated Video Metrics

http://www.bloomberg.com/news/articles/2016-09-23/facebook-says-it-gave-advertisers-inflated-video-view-metrics

[glorysk87]

Facebook Says It Gave Advertisers Inflated Video Metrics

http://www.bloomberg.com/news/articles/2016-09-23/facebook-says-it-gave-advertisers-inflated-video-view-metrics

 

I don't think this is a big deal.  Marketers have been overwhelmingly positive regarding the ROI's they're earning on Facebook's platform. They buy advertising based on ROI's, not based on FB's reporting metrics.