Vorpal Trade: Should You Like Facebook?

In “Everybody Hates Facebook” at NotBoring, Packy McCormick writes an extensive analysis of everyone’s favorite/least favorite social media company, Facebook. Since there is no sense in repeating work, this posting about Facebook is primarily our link to Mr. McCormick’s work, and our comments extending from it.

For the record, some FB numbers: $275.55, PE 31 (ttm), EPS $8.78 (ttm), 2.854 billion shares, $94 billion shareholder equity, $7.846 billion net income on $21.47 billion revenue in 9/30/20 quarter.

It’s clear from the net margin that this is an amazing business model. Not just in theory (as in “unicorn theory”), but in fact. The main hazards are antitrust, and somehow losing their grip to a young upstart social media company.

McCormick’s article is lengthy, entertaining, and full of the grit that is needed for an equity story. His overall thesis is that FB is undervalued relative to the FANG (FAAMG? FAAMNG) bunch, and that the stock hasn’t moved this year as far as the other giant internets. So, why might he be wrong?

The antitrust risk is multifaceted. Blocking competitors is a key component of FB’s strategy. Clearly, the reason people use FB is because their friends use it. Any competing social product has the potential to move the center of gravity away from FB. The motive is clear, and FB has been caught directly engaging in behavior designed to kill upstarts. Several years ago the WSJ did three stories on how FB used its VPN subsidiary Onavo to obtain inside info about small competitors experiencing rapid growth. When users of the Onavo VPN visited these new sites, FB would learn about it because all of the traffic would go through Onavo. When FB saw an emerging competitive threat, it dispatched a firefighting team to quickly build the same features into FB.

The Instagram and WhatsApp acquisitions are of the same motive, as were the attempts to buy Snapchat. FB clearly aims to be the only social media platform, and this motive will not work in their favor in antitrust actions.

What if FB is broken up? Would it be worth more? Unlikely. The purpose of owning IG and WA is to lock in the monopoly of interpersonal online connection. If IG and WA are spun off, they would be worth less than the sum of the parts. Either they all survive and fail to capture the central platform effect, or potentially one of the other two win the war and send FB the way of MySpace.

Weaknesses

This is not news, but there are substantial groups of people that dislike FB on principle and in fact. Netflix’s the Social Dilemma (indirectly) puts FB at the center of problematic online social interactions. If society fixes that problem, it hits FB hardest. Even without concerted legal or social action, if people are given a path around or away from FB, many will take it.

FB has ethics problems. The corporate culture thoroughly reflects this, with several executives of the acquired companies having highly visible disagreements and separations from FB. FB has been repeatedly caught being sneaky with the structure of its information sharing, privacy controls, and use of information. It compiles dossiers on non-users as well, which is not illegal (other data aggregators do the same thing), and it is a spotlight issue for FB, but the point here is that the ethics reflect a sense of entitlement on FB’s part.

The data Hoovering and ethics problems could be compounded further if FB is hacked in a substantial way. First, it is unlikely that if FB were hacked and they discovered it that they would provide timely notice of the problem. Second, a nation state hacking FB gets a huge trove of personal information, made worse by the fact that FB collected too much of it. This will happen, and it will happen more than once. FB will never be able to convince people that it is a good steward of their information, because of the ethics problems built into the corporate culture.

Wildcards

I am wondering, what if FB becomes a social justice target? If FB were perceived as privileged or encouraging expressions of privilege, it could lose a substantial chunk of highly active young users to another social media platform.

On the other hand, what if FB becomes an “anti” social justice target? That is, if social justice takes over FB, so that people must play along with the mores of social justice, will those with more traditional views might either disengage or get booted from the platform. People being “othered” or “cancelled” could impact their business model, cause legal complications, or make FB even more distasteful to some people than FB is now.

Innocuous Details

After watching several Jordan Peterson videos recently in which he described some of the sense-mind interactions in which the body is actively involved in “seeing” the world, I am less convinced that FB’s investment in Oculus will pay off. VR can't involve those aspects of sensation.

Worse, is VR detrimental to users? I’ve experienced some high quality VR done by a top movie industry special effects producer, and while it was amazing, somehow VR use doesn’t mesh into experiences in the rest of the world. I’ve seen this several times; amazing demos, crazy awesome applications, followed by nothing. Will it really be an advantage to the customer of VR to disengage from the world?

Conclusion

FB has already conquered the user base. Growth from here depends on maintaining contact with that user base and increased spending on digital advertising. A substantial portion of the media market has already been converted to digital, so we're well past the middle of the S curve there.

On the other hand, future growth in revenue will be possible because FB's platform allows it to extract rent from advertisers. All other gains in production in the economy then flow through FB's advertising system as increased revenue.

Despite the problems, the "low" PE makes FB a worthwhile minor investment, will moderate prospects for above market capital appreciation. Those with informed data on antitrust activities should, of course, prefer using that information to override this conclusion.