FB - Facebook

[D33pV4lue]

I'd rather own Google. I think this could be a tough year for FB. California Privacy regulation could prove to be a big hit, both in terms of a slow down in spend on FB and increased cost. Obviously you can't just implement in California so now the entire US has to operate under the bill. They sort of glossed over it on the call but I think this will be a larger headwind than it is made out to be. 

[Jurgis]

I'd rather own Google. I think this could be a tough year for FB. California Privacy regulation could prove to be a big hit, both in terms of a slow down in spend on FB and increased cost. Obviously you can't just implement in California so now the entire US has to operate under the bill. They sort of glossed over it on the call but I think this will be a larger headwind than it is made out to be.

 

Out of curiosity: how is Google ad business less affected by California law than FB ad business is?

[D33pV4lue]

I'm not sure how familiar you are with the differences between the two platforms. While exact numbers are not disclosed, a majority of Google's ad revenue comes from search. There is no tracking or limitations from privacy laws on this segment of the business. Simply companies bidding on keywords in order to be placed at the top of a search result. Whereas a majority of ad spend on FB is dependent on tracking ads. FB puts together a profile of you based on how you interact on FB but more importantly outside of FB (website cookies) the new laws limit the ability for them to do this plus Apple and Google are making changes to block companies from doing this. Therefore FB will have to rely more on activity on FB to create an ad profile. For Google, this segment would be youtube/google properties network except they have a vast amount of information from searches to create a better profile, IMO. 

[Liberty]

https://stratechery.com/2020/facebooks-platform-opportunity/

[griezeman23]

Thanks for the great post, Liberty.

 

Interesting from Ben, as always. I love the differentiation b/w platforms and aggregators. Hence, why FB should trade at a discount to Google a.e.e.

 

The R:R setup at $200 is decently compelling (I thought $175 in the fall was a bargain and $130 last winter moreso) and like what management has done (even though I think someone should have got the boot b/w Mark and Sheryl for the last couple of years).

 

I do think that FB is going after a platform business model with its Spark AR and Oculus VR. It will be interesting to see if they are 1. successful and 2. if these spaces are even meaningful from a bottomline standpoint.

[DanielGMask]

https://www.nytimes.com/2020/01/07/technology/facebook-andrew-bosworth-memo.html

[Liberty]

https://www.reuters.com/article/us-facebook-tax/facebook-faces-tax-court-trial-over-ireland-offshore-deal-idUSKBN20C2CQ

[ERICOPOLY]

The first poster of this thread mentioned his teenage kids used it.

 

My 16 yr old stepchild doesn’t.  My 14 yr old daughter doesn’t.  They don’t want Facebook either.  It’s a ‘boomer’ thing they say.  None of their friends use it.  They all are using Instagram and WhatsApp.

 

 

 

[Spekulatius]

The first poster of this thread mentioned his teenage kids used it.

 

My 16 yr old stepchild doesn’t.  My 14 yr old daughter doesn’t.  They don’t want Facebook either.  It’s a ‘boomer’ thing they say.  None of their friends use it.  They all are using Instagram and WhatsApp.

 

My son and his friends are almost exclusively using Snapchat.

[ERICOPOLY]

My daughter also uses Snapchat for ‘filters’, Tiktok, and she uses VSCO.

[Liberty]

https://www.fastcompany.com/90470219/project-lightspeed-how-facebook-shrunk-messenger-down-by-75

[peterHK]

The story of FB isn't in developed markets. FB is synonymous with the internet in EM. That's the opportunity ahead of it. I also believe Instagram is going to be bigger than core FB in time.

[valueinvestor]

Just initiated in a position with facebook again - @14x earnings net cash (while assuming normal capex) - it's an acceptable risk. Although they have been hit with a lawsuit by the EU to the tune of $529 billion, but google had a similar one, where they only paid $5B.

 

With the coronavirus, I'm sure engagement on online social media will spike and people will be surprised that facebook had whether through this storm. Although ad spend may reduce, it would probably be the best time to spend right now when more people are on the app.

[johnny]

Ad impression/conversion prices may go down, but the inventory is going to go up, not just because people are home more, but because the Current Events are inherently the sort of thing that are going to make people want to keep their finger on the pulse of local communities.

 

I recently moved from LA to a pretty rural area (~30k people) and was shocked to see how much more central to the every day lives of the locals Facebook is here than in the city. Nobody here cares about Coronavirus yet, because it's all fakenews yadda yadda, but once the first body drops here every grandma is going to be on her newsfeed 24/7, accidentally tapping twenty ads a day.

 

Even if this wasn't the case, they're perfectly situated to ride out even a two-year catastrophic scenario, liquidity-wise. The real question is if we might be re-entering a world where 15x is actually not considered a bargain multiple at all. But if there is any company in this market to buy at 15x, it is absolutely Facebook. Certainly I'd be selling Apple to buy Facebook, for example.

[valueinvestor]

Ad impression/conversion prices may go down, but the inventory is going to go up, not just because people are home more, but because the Current Events are inherently the sort of thing that are going to make people want to keep their finger on the pulse of local communities.

 

I recently moved from LA to a pretty rural area (~30k people) and was shocked to see how much more central to the every day lives of the locals Facebook is here than in the city. Nobody here cares about Coronavirus yet, because it's all fakenews yadda yadda, but once the first body drops here every grandma is going to be on her newsfeed 24/7, accidentally tapping twenty ads a day.

 

Even if this wasn't the case, they're perfectly situated to ride out even a two-year catastrophic scenario, liquidity-wise. The real question is if we might be re-entering a world where 15x is actually not considered a bargain multiple at all. But if there is any company in this market to buy at 15x, it is absolutely Facebook. Certainly I'd be selling Apple to buy Facebook, for example.

 

It can play out any sort of way, but a multiple compression affects all stocks - not just value stocks. Secondly, if inventory goes up - it will be a matter of time until it goes down, when people re-evaluate where their marketing spend will go towards. In terms of advertising platforms, LinkedIn, Facebook, Google reign supreme.

 

But let’s assume the worst - if there’s a multiple compression, and it’s growing at a moderate rate, then that only affects the value of the stock, not the performance of the operating business. If Facebook can grow without counting any options like (Facebook Libra, Oculus, Portal, and more), it will grow into its valuation.

[plato1976]

Not only 15x is cheap, it's really cheap actually in this env;

long term rate is 1% and may just stay there, if you can prove this 15x is a declining pe ratio rather than a rising one, this is dirt cheap, b/c I think for a quality mild growth company the reasonable pe ratio should be in the north of 30 if 1% is the sustaining long term rate

 

 

Ad impression/conversion prices may go down, but the inventory is going to go up, not just because people are home more, but because the Current Events are inherently the sort of thing that are going to make people want to keep their finger on the pulse of local communities.

 

I recently moved from LA to a pretty rural area (~30k people) and was shocked to see how much more central to the every day lives of the locals Facebook is here than in the city. Nobody here cares about Coronavirus yet, because it's all fakenews yadda yadda, but once the first body drops here every grandma is going to be on her newsfeed 24/7, accidentally tapping twenty ads a day.

 

Even if this wasn't the case, they're perfectly situated to ride out even a two-year catastrophic scenario, liquidity-wise. The real question is if we might be re-entering a world where 15x is actually not considered a bargain multiple at all. But if there is any company in this market to buy at 15x, it is absolutely Facebook. Certainly I'd be selling Apple to buy Facebook, for example.

[valueinvestor]

Not only 15x is cheap, it's really cheap actually in this env;

long term rate is 1% and may just stay there, if you can prove this 15x is a declining pe ratio rather than a rising one, this is dirt cheap, b/c I think for a quality mild growth company the reasonable pe ratio should be in the north of 30 if 1% is the sustaining long term rate

 

 

Ad impression/conversion prices may go down, but the inventory is going to go up, not just because people are home more, but because the Current Events are inherently the sort of thing that are going to make people want to keep their finger on the pulse of local communities.

 

I recently moved from LA to a pretty rural area (~30k people) and was shocked to see how much more central to the every day lives of the locals Facebook is here than in the city. Nobody here cares about Coronavirus yet, because it's all fakenews yadda yadda, but once the first body drops here every grandma is going to be on her newsfeed 24/7, accidentally tapping twenty ads a day.

 

Even if this wasn't the case, they're perfectly situated to ride out even a two-year catastrophic scenario, liquidity-wise. The real question is if we might be re-entering a world where 15x is actually not considered a bargain multiple at all. But if there is any company in this market to buy at 15x, it is absolutely Facebook. Certainly I'd be selling Apple to buy Facebook, for example.

 

Again, imho, best way to combat multiple compression is secular growth stocks. I don’t believe bank stocks are a great way to hedge because although their NIM increases, their multiple will still be compressed.

[blainehodder]

15x what? Pre Virus guesses?

 

I also think it is cheap but we should forecast a couple yrs out imo.

[elliott]

15x what? Pre Virus guesses?

 

I also think it is cheap but we should forecast a couple yrs out imo.

 

true. how you arrive at a given multiple is key. I have often found that whenever someone mentions that a certain stock is trading cheaply, I do my DD and find it trading dearly.

I wonder if somebody else has a different PE for Facebook. I would provide mine, except for the fact that last time I looked into this company was more than a year ago.

[chrispy]

My wife and I facebook lived stream last night for the first time a local musician jamming with a "tip jar" through venmo and PayPal. He had 900 viewers for 2 hours. I expect this to become normal

[LC]

My wife and I facebook lived stream last night for the first time a local musician jamming with a "tip jar" through venmo and PayPal. He had 900 viewers for 2 hours. I expect this to become normal

We did the same - dropkick murphy's livestreamed a show for St patrick's day on youtube. New normal?

[manuelbean]

Hi everyone

 

I don't know about you, but I look at Facebook on a normalized FCF basis where I make 2 adjustments:

 

1) I subtract share base compensation from the "Cash from operating activities". (To those who think that SBC shouldn't be accounted for as an expense, what would happen if all the salaries were paid in stock? You, as a shareholder, wouldn't see an immediate cash outflow, but your % of ownership would be diluted in the equivalent amount). This was $4,8B in 2019.

 

2) I think the $15B in CAPEX is obviously exaggerated. What would be a "normal" expenditure? I use $10B in my calculations, but this is just a guess. What do you guys think?

 

All in all, these adjustments lead me to roughly the same FCF that the company states which is around $21B.

 

But shouldn't we back out the cash from the MarketCap to get the Enterprise Value? At a Market Cap of $452B and Cash and equivalents of $55B, the Enterprise value would be $397B.

 

So, normalized EV/FCF would be 19. Is that cheap? You tell me.

 

Note: I know we're looking at the past here and that 2020 will be different.

 

 

 

 

 

[johnny]

15x what? Pre Virus guesses?

 

I also think it is cheap but we should forecast a couple yrs out imo.

 

I think the past month has demonstrated that Facebook is an absolutely irreplaceable utility for most first world citizens. Honestly, imagine somebody who makes $40,000 a year, and try estimating their consumer surplus from Facebook use. If you could enforce an agreement for them not to use the Facebook family of products for one year, what do you think is the minimum amount of money they'd demand? I think this number is easily in the thousands.

 

I've been a long-time Apple owner (though off and on) since 2012, and I recently realized that at roughly the same valuation, Facebook is easily the better buy. Again, similar thought experiment. Imagine telling a dual iPhone/Facebook user that they could choose: Either an iPhone but no FB products, or a Samsung Galaxy with FB. What do you think that split is like in America? I'd guess 10 to 1. One of these companies is monetizing at pretty close to their customers willingness-to-pay, and the other is capturing maybe 10% of the surplus via advertising. Whose long-term prospects excite you more?

 

A few years ago, in this thread, I was skeptical of Facebook's monetization; the ads I saw were all cash-burning startups and I was convinced that too much of the ad inventory was being irrationally purchased with hot money. This may turn out to be true--CPM is certain to go down. On the other hand, impressions are going to go up enormously. Of course, this is sort of the worst time for more impressions, narrowly speaking--they're not likely to price super well. But those impressions are not a one-time bounce, in my view. Sure, when the economy/health situation normalizes, people will not be loading up Facebook quite as much. But I suspect their base utilization will be higher.

 

Facebook is strategically digging its way down to the base layers of Maslow's hierarchy. They are very deliberately making themselves -the- source for COVID-19 information; not just globally/nationally, but more important locally. If you want to know what is happening in your particular hood of BFE, Facebook is the only way to get it. MSNBC isn't going to tell you what's going on in northern Wyoming. When things get back to normal, the average users idea of what Facebook is for is going to broaden--that breadth will create new opportunities for more product extensions and monetization potential.

 

But what if things don't normalize soon enough? Well, the longer and worse this crisis is, the better for Facebook. It'll give them even more time to validate their platform as the go-to source for anything important, the go-to source for connecting with family and friends and broadly sharing information/news. And unlike many other companies, they have no debt and ample cash--they can ride out an advertising recession for -years-. In the most nightmarish scenario (>1% of the entire population dying), certain aspects of high-stakes real-life socialization that we take for granted will simply have to be replaced. There will not be sufficient processing capacity for funerals/memorials, and even if there were, it simply will not be safe to do them in the normal way. As morbid as it is, these will be massive opportunities to create products that "shift" these incredibly important personal experiences to the internet.

 

Finally, you'd better believe the regulatory heat is gone now. There are simply bigger issues in society than litigating this stupid culture war battle and trying to figure out if Facebook is helping the libs or the MAGAs. Facebook is behaving in a way that will retrospectively validate their existence. They will be correctly perceived as an asset to the state, and probably treated more appropriately going forward.

 

15x is a bargain. As is 20x. If you came from the future and told me that 10 years from now Facebook was monetizing US/Canadian users at $300/year, I wouldn't flinch. There are just an overwhelming number of ways that number could double, but fewer and fewer plausible ways for me to imagine that number getting cut in half.

 

We'll see in a few quarters how right or wrong this is.

[Spekulatius]

 

We'll see in a few quarters how right or wrong this is.

 

The coming quarter will suck for FB ad revenues and GOOG’s for that matter, because people are not buying much and man business are not advertising. Ad revenues tend to scale with GNP and if GNP is going to be down 20% a quarter, FB and GOOG are taking a hit, even if they increase market share a little. I do agree that user engagement is way up for FB.

[johnny]

As of right now: the majority of earners in this country are fine. Finance bros, legal bros, doctor bros, they're all getting checks just as big as ever. As long as we don't tip over into a self-fulfilling prophecy where the people with money start engaging in mass anticipatory belt-tightening, the value of those specific ad impressions will not merely be preserved, it may be increased (as non-or-weakly targeted ad programs become vastly less performant).

 

I'm not predicting no-drop. I'm just saying we have no reason to expect this company to stop making money--it'll just make a bit less for a while, while having the incredibly privilege of being able to build out its moat aggressively in the meantime.

 

Example: small restaurants are becoming (in rural areas) almost totally reliant on Facebook. They've got nothing to do but sit around and ponder how to drum up as much pickup-only business as possible. As a result, THEY'RE spending more time than ever on the platform: updating hours, adding menu images to the pages, engaged in organic social media promotion, posting videos, learning how to use Stories to push expiring product. This isn't theoretical--I'm watching it happen right now. A lot of small businesses are going to collapse, but the ones who survive are going to have spent a month or two building up some very Facebook-specific human capital. This will all have a negative effect on the income statement (no revenue, some costs), but as a shareholder you love to see it.