Facebook has been previously written up on VIC as a short in 2012 and as a long in 2017 and 2018. I assume the majority of investors are familiar with the basics of facebook, Instagram, whatsapp and messenger.
Our investment thesis is very simple: Facebook is growth company trading at a in-line with market multiple of 20x for 2021. We believe there is a ~50% chance that Facebook can continue to grow revenue for 20% CAGR for the next 5 years. The main driver being increasing ARPU. ROIs are still triple digits in the US and ARPU around the world is much lower than of the US, even adjusting for GDP. We also believe that there is a huge overhang with the election. Trump is the most divisive president ever and it has been a huge negative for the company and the stock price. Facebook has never recovered its multiple from Cambridge Analytica.
Social media is here to stay. Period. There are over 3 billion users using a Facebook product, including over 2 billion using facebook, which is still growing at a mid-single percentage rate.
Social media landscape: There are a few different social media app. Notice that they all serve a different purpose. We really like the economics of this industry and we are long a few of them besides FB (SNAP, PINS). The business is very attractive because social media is a platform that becomes more valuable and has a bigger moat the bigger and more users they have.
There are two reasons this is a phenomenal industry.
§Very high GM – similar to software once you scale
oServer /AWS is largest cost of good
§High barriers of entry
oCompetition within the industry is differentiated (and overall friendly)
One important point. Social media is MUCH more popular with women. Women are much more social. The only app that is used by more men than women is Twitter. Also, please note that the objective here is not whether you use or not facebook; understand that FB products are for the “masses” and a form of entertainment that is not tailored for a 40 year-old male fund manager.
Let’s discuss the platforms:
§Facebook: The (almost) original (myspace?). Reached terminal velocity first. This is the platform you have to connect with your friends from college. There is simply nothing like it. It is basic. It has its pros and its cons. The platform became disliked by many due to the polarization and “fighting” from Trump, populism and a wide political spectrum.
§Instagram: Mostly pictures. You follow friends and celebrities. Looks matter. Photo quality matters.
§Whatsapp: Largest communication network outside of imessage. In my opinion best quality phone calls. Insanely popular overseas.
§Messenger: Another app by facebook. Similar to whatsapp. Initially. biggest difference is the “independence of facebook” – was not a standalone app. From a business perspective, they will monetize messenger first.
Non FB Platforms
§Tiktok: App that creates music videos that are 30 seconds long. The app is entertaining for some. It’s filled with daredevil stunts, people showing off their bodies and performing sexual innuendos. Intended for younger demographic. Most users only watch and do not post videos.
§Snapchat: How many teenagers communicate. Messages delete themselves (a favorite option). Some content that is not user generated (i.e. lower gross margins) but of some entertainment
§Twitter: Platform to express views to the public. Users tend to be older than in all other demographics. Used the most by men and in a professional setting (outside of LinkedIn)
§Pinterest: ~90% of users are women. You can “pin” pictures of your dream house, kitchen, living room, wedding, etc. Of high potential to advertisers because user is showing VERY strong intent
These are the main apps. There are other smaller ones that are part of YY, but are too small to add them to the list. What is interesting is that all these apps are somewhat different from one another and don’t compete head to head. This is why I think Facebook’s moat is really strong.
I’ve talked to many investors regarding facebook, and they use their own personal experience with the app as a signal that the facebook is not as strong as it used to be. I believe this is misleading. Facebook serves different purposes for different people at different points in their life.
Another way to think about social media is by whether the purpose is public or private. For instance, whatapp is meant to be private, as opposed to Twitter which is meant to be public. Facebook is closer to private in the scale, but they are pushing towards groups. Instagram is public for celebrities who want attention and followers, and private for those not wanting to share content to everyone. Twitter is meant to be public.
It’s hard for Facebook to dethrone Twitter. They are different apps. Instagram did have some overlap with Snapchat, and Instagram won. Snapchat had to reinvent themselves by generating content and converting into more of a messaging app than a “stories” app. This is an example of how facebook via Instagram dominated a segment: Instagram Stories was taking off, facebook copied, and improved the concept and dominated the market. They have many more engineers so they made it much easier to create a story. The layout was much nicer. It is essentially impossible to compete with facebook – in other industries you have patents — what are you going to do, sue for making a cool hotdog animation?! With more engineers it’s virtually impossible to beat these guys at this game. In essence you have a moat from the giant platform and the fact that all users and content creators are there AND from the engineering side.
Here are some reasons why we are bullish:
§More regulations cements incumbents
§Facebook revenue is over 20x larger than Twitter
§Facebook is creating Libra, a digital currency. We believe this is a free call option. It could potentially be huge
§Facebook margins may expand. Security costs should largely be fixed. Facebook is overspending to make sure that there is no relapse of 2016 elections
§Oculus, the VR division is the leader of the industry
§Covid is bringing the world together via facebook. People are liking facebook again.
§Facebook has goodwill from covid. Congress will focus less on facebook – especially after the elections.
§Facebook has been making moves:
oBought 9.9% of Jio Platform – it is clear they are following the wechat platform in India
oRecently bought Giphy — the top source of GIFs, content to make memes.
§Facebook has yet to monetize whatsapp and messenger, each app has over 1 billion users
In summary, we believe ARPU should increase because ROIs are still triple digits in most instances. The platform is growing and it will be more connected than ever before. Mark Z. is probably one of the best CEOs there is an he is only 36. There are only a handful of businesses that have seem to have always luck innovating and creating different products with incredible visionaries and CEOs such as Apple under Steve Jobs, and Amazon / Jeff Bezos. Investors will eventually give Mark Zuckerberg credit. His platform is used by 3 billion users. This is over half of the population with access to internet (we exclude China, where FB is not allowed). 4 of the apps are larger than 1 billion. At only 36, FB is the 5th largest company in the S&P, ahead of Berkshire. Mark is not showing signs of slowing down. He is going for the full vertical from ad to last click /shop attribution. He is going for VR, and whatever is next after VR. He is going to try to create Libra, he is going to try to create a wechat network in India.
With an earnings yield of ~4%, we believe the company can (1)grow revenues at 20%+ for the next five years, (2) grow margins could also increase to previous levels (net income of 45% vs current 2021 estimate of 32%) given economies of scale in the security area, especially via automation, and (3) rerate much higher than market multiple for this business— perhaps 30x-35x, , about 50% higher than today, close to historical levels before Cambridge analytica.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
Earnings surprise, less combative politics post-Trump, and margin expansion in 2021