There's not much left to say about Facebook's (NASDAQ:FB) amazing Q2 results that hasn't already been written. Longs appear to be floating - carried by the gratification of another well-deserved victory lap following years of criticism and doubts concerning FB's ability to succeed and thrive. A quick jog down memory lane, 4 years in techie time, and we can extract questions like, "How much more valuable do you think Facebook is than Yahoo (YHOO)?" These are stark reminders of how quickly relevance can fade amid poor leadership, ignorance of trends, and the inability or impossibility to adapt and cope with the never-ending bombardment of competition. Yes, Facebook is a winner, but it would be negligent not to examine some of the unique facets that makes this machine so phenomenal, likable, unlikable, and vulnerable.
This summer, Christiano Ronaldo, an athlete with 116 million Facebook likes, approximately 100 million more than Donald Trump and Hillary Clinton combined, was asked during the UEFA Euro 2016 tournament what he thinks about when thousands of stadium spectators heckle him. To paraphrase his response from an all too familiar, customary question posed to him: If he wasn't great at what he was supposed to be doing, then there'd be no booing.
Economists at the Universities of Warwick and Oxford in the UK, conducted research to gain more insight as to the lengths people go to hate a winner. While playing with real money for the experiment, the researchers discovered that the majority of test subjects would "burn away" other peoples money if they were deemed "winners" undeserving of that money.
Facebook's greatness is what makes the company such a large target to those threatened by its progress as a winner and the brazen short sellers willing to steal the golden goose and get away before the giant catches them.
Readers may recall KL Group, a hedge fund that was operated in West Palm Beach, Florida and a prime example of burning money. In the early part of the new millennium, the group, which had been located only a few walking blocks from my office, had gained chatter around the local investment community as some kind of house of trading magic. To prove his skills, Won Sok Lee, a principal of the firm, would host live trading clinics, like the styling and flare one would expect of an Emeril Lagasse cooking show. During events meant to impress eager investors, Lee would dish up profits right before hungry, qualified eyes. As Guy A. Lewis, a former US attorney commented, "This wasn't just a straight fraud. It was hocus-pocus, smoke and mirrors."
By 2010, Won Sok Lee was sentenced for 25 years in prison for a Ponzi scheme that defrauded investors of nearly $200 million. During that investigation, authorities learned that Lee, in full audaciousness, would sell short some of the healthiest, momentum trades of that time, like the aforementioned Yahoo, which reversed a downward trend in late 2002 and climbed steadily for the next 3 years. If the KL Group were in operation today, you can be certain that Lee would be shorting Facebook too, hoping to beat the giant.
The Famous (Infamous?) Princeton Study
According to Princeton University Researchers, there are approximately 4 months remaining before Facebook loses its user base by 80%. They had likened Facebook to an "idea" and argued that ideas, like diseases, "have been shown to spread infectiously between people before eventually dying out, and have been successfully described with epidemiological models." Certain Ponzi schemes, specifically the hubris of the KL Group, valued other peoples' money as disposable tools to execute trades on emotions, rather than facts; whereas the Princeton study valued compelling, scientific evidence. Specifically, researchers had used MySpace, the half-billion dollar News Corp. flop, as a prime example to state their scholarly case.
Technically, while there is still time left for this theory to come to fruition, it poses two meaningful dangers. The first: smart people can be wrong. And the second: when smart people are consistently wrong, investors become more relaxed and vulnerable to a crying wolf syndrome. Assuming, that is, eventually somebody could time Facebook's theoretical demise just right.
An early, 2015 article by Digital Trends writer Marc Schenker sought to shed some light on how Facebook managed to annihilate MySpace at its own game. According to Mike Jones, former CEO of Myspace, Facebook was "able to overtake MySpace because Facebook 'perfected' the social networking concept, whereas MySpace just introduced people to it. Combined with the Princeton theory, it means that MySpace acted as the carrier of the social networking idea or "disease," and Facebook manifested as the infected patient.
Equating Facebook to a disease is inherently prejudicial, whether by premeditated design to draw the inevitable, negative outcome of the social epidemic - or not. By bending the theory ever so slightly, we can remain within the realms of biology, yet, this time, lean towards the fundamental aspects of uniquely human communications. Michael Tomasello, Codirector of the Max Planck Institute for Evolutionary Anthropology, argues that human communication are "biological adaptations for cooperative social interaction in general and that the purely linguistic dimensions of human communication are cultural conventions and constructions created by and passed along within particular cultural groups."
In other words, we, as humans, are adapting modes of communication driven by new, cultural ideas, like Facebook, which imperceptibly ignites an irreversible altering of the way we evolve. That is, we don't have to post something on Facebook to survive as a species, but we do it anyway.
"Too Much Time on My Hands" - Styx
Tomasello is not alone in redefining how the complex dynamics of cultural constructions impact our social interactions. In the Fall of 2015, the World Economic Forum recognized that Facebook was changing the social life of our species, while also debating both the positive and negative consequences of this global transformation. It has been opined, in efforts to further define and determine Facebook's demise, that if it weren't for users having so much free time on their hands, Facebook would not be able exist at all. In my opinion, I believe that the exact opposite of that notion is true. Daniel Hamermesh, a Professor of Economics at Royal Holloway University of London, calls this a "yuppie kvetch." Applied to Facebook, users are drawn to it in order to save time rather than communicate via other, more time-consuming methods, like linguistics.
John Hawks, a Professor of Anthropology at the University of Wisconsin-Madison explains that humanity, specifically the human brain, is evolving. He notes, "Although the past does not predict future evolution, a greater integration with technology and genetic engineering may catapult the human brain into the unknown, further fueling this ongoing communication evolution. Perhaps, this might read as a bit of a stretch; however, while Facebook is considered a technological integration, separated physically by the devices to wield its communication capabilities, we are currently sitting on the precipice of real, genetic engineering for our species. On May 02, 2016, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) filed a patent for an implantable electronic eye device. The implications these kinds of technological trends have, should Facebook continue to adapt and evolve, are both amazing and frightening. As for the latter, a reading of M.T. Anderson's 2002 novel Feed (pre-Facebook) provides an eerie, dystopian take on genetic engineering that favors data mining to provide feeds (sound familiar?) in order to support consumerism.
Today, while Google's early models promise wireless updates for corrective lens prescriptions, we can easily draw an evolutionary line to more advanced, profound bionic eye features, like those of Steve Austin, the Six Million Dollar Man. In this future, we can post optical updates to our friends instantaneously.
The Trend is Your Friend
I am long Facebook because it is the 5th most valuable company in the world, diluted EPS was up 184% year over year, and mobile advertising revenues were up 81% year over year to $5.2 billion. I am long Facebook because it is a winner. Be that as it may, exuberant posts from other longs, like tomas2315 on StockTwits who writes, "I have bought each time when it has been down…and you know what? It has always popped!… long," causes me to shudder. Such blind determination and faith could be dangerous, especially for investors who might not be as nimble, savvy or willing to detect technical and fundamental changes, should warnings similar to the Princeton study one day ring true.
While there are, and will be, daily threats from the other side of the emotional trading spectrum, particularly concerning Facebook's "inevitable" collapse, I continue to remain long because of its "network effect." IAS Research, in a recent Seeking Alpha article describes it like this: "Because of the sheer size of its user base, it is difficult for any single average FB user (who is likely to have most of his/her friends/family on FB) to switch to another social networking platform." I am reminded of Richard Lewis, who played in the hit HBO series, "Curb Your Enthusiasm." In the episode, "The Thong," Lewis learns that his male psychiatrist wears a thong to the beach. Feeling that it is a perversion which somehow taints the shrink's analyses, Lewis laments that it is just too exhausting and time consuming to start all over and begin his story again with another psychiatrist.
There are Facebook users who have used the platform since its beginning, fostering a positive self-image and timeline of their own life stories. Starting all over and moving on, like in the Lewis example, will not be so easy. And, as of this writing, there don't appear to be any other alternatives to replace Facebook to make that option viable. Reddit currently claims that it can be "as big as Facebook," but in my opinion, it doesn't even come close in comparison of overall user experience. Of course, that doesn't mean that longs should ever drop their guard and not take any cry for wolf as a legitimate threat.
Disclosure: I am/we are long FB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to conduct their own due diligence and consult an investment advisor prior to making any investment decisions. I look forward to reading you thoughts on the subject. If you found this article interesting, please click on the follow button below. It would be greatly appreciated.