Facebook: It's All About The Vanity Of The User

| About: Facebook (FB)

Summary

Facebook's network effect is a well-documented competitive advantage.

The company, however, has something much bigger going for it - human nature.

Cash is king, and Facebook is generating tons of it. The company is one of our highest conviction ideas.

Image Source: Sean MacEntee

"Say what you want about Facebook - cash is king, and it has a lot of it and is generating a lot of it with each passing quarter." - Valuentum Securities

By Brian Nelson, CFA

Our thesis on Facebook (NASDAQ:FB) is one grounded on the firm foundation that the company holds one of the strongest competitive advantages of any business model - the network effect. What a network effect creates is quite simple to define, but extremely difficult to replicate. Said differently, as more users become engaged with Facebook, more businesses want to interact with Facebook, and as more businesses interact with Facebook, more users may want to engage within Facebook, and so on. It is a virtuous cycle of proliferating advertising revenue growth and optionality, much like we've witnessed with eBay's (NASDAQ:EBAY) auction business in the early days of the Internet and with the likes of MasterCard's (NYSE:MA) and Visa's (NYSE:V) credit card processing network today. But Facebook has another very, very big thing going for it that arguably other network-effect driven equities don't - even Twitter (NYSE:TWTR) and LinkedIn (NYSE:LNKD) don't have it.

Facebook is all about the vanity of the user, and the company allows this to come through better than any other social media giant. On Facebook, it's all about "me," and people love that. Whether Facebook is good for generating a balanced perspective on issues or life in general may not matter. People love seeing what they want to see in their own personalized feeds. They love showing off all of their favorite looks, putting their best selves forward in every respect. It's some blend of Toby Keith's "I Wanna Talk About Me" and Brad Paisley's "Online." The beauty about Facebook is that it is everything that anyone could ask for... online, and what's more, it's all about "me." There is no authority on opinion - in many ways, one can argue that it's not that frequent that the "right" opinion is the most popular in the comments section. Sometimes facts don't matter on Facebook. The social media giant has brought society back to the days of high school. When it comes to Facebook, it's not about how happy one is in his/her life, it's about how many likes one picture gets. Have you seen this one, "Let Me Take A #Selfie." Nobody is going to post their late-night adventures on LinkedIn, and Twitter makes it so difficult to find other acquaintances on the platform that it has become more of a news site than a social media platform.

Millions of people may not like Facebook for whatever reason, but the billions of others that do is what matters to our thesis on the company. Facebook captures the vanity of society at its core. More than 28 million likes for Kim Kardashian West. Almost 75 million for Taylor Swift. Nearly 77 million for Justin Bieber. Over 111 million likes for Cristiano Ronaldo, the first athlete to break the 100 million barrier. Now anyone and everyone can follow their favorite celebrity and "keep up with them." Facebook has hit at the very essence of human nature, the need for belonging and social acceptance, and perhaps it takes advantage of people's insecurities monetarily. How many likes does my business need before we acquire social acceptance? How much will it cost? What about my personal page? How many likes do I need there? And how much will that cost? The measure of success on Facebook is no longer happiness in life, but how many likes one can showcase on a fan or business page. Facebook has become the popularity contest in the days of high school, but it allows individuals and businesses to pay to become more "popular." What a tremendous facet to add to its mission to connect the world. For Facebook to fail, human nature must change - humankind in some ways must cease to exist.

Facebook's stock continues to soar following a strong first quarter report, released April 28. During the three months ended March 31, revenue leapt nearly 52%, while GAAP income from operations more than doubled as its GAAP operating margin leapt a full 11 percentage points. GAAP net income more than tripled, while GAAP earnings per share increased to $0.52 from $0.18 in the year-ago quarter. In the first quarter, daily active users (DAUs) jumped 16% year-over year, mobile DAUs jumped 24% year-over-year, monthly active users (MAUs) increased 15% year-over-year, while mobile MAUs advanced more than 20% - strong performance across the board. Cash and cash equivalents came in at $20.62 billion at the end of the first quarter of 2016 as it hauled in $1.85 billion in free cash flow during the period. Say what you want about Facebook - cash is king, and it has a lot of it and is generating a lot of it with each passing quarter. We won't be parting with Facebook anytime soon, and frankly, we may very well be in the early innings of Facebook's meteoric stock rise. The stock is one of our highest conviction ideas.

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This article or report and any links within are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of this article and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the article and are subject to change without notice. For more information about Valuentum and the products and services it offers, please contact us at info@valuentum.com.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: FB is included in the Best Ideas Newsletter portfolio.