Facebook - If The Ads Run Out

Summary

• 2 out of 5 of Facebook's most important competitive advantages show signs of erosion and weakening fundamentals.
• Facebook faces an increasingly challenging competitive environment, especially in light of its recent announcements in FY Q2 2021.
• The valuation offers hope in terms of a buffer/margin of safety.
• Continued insider selling and a weak technical setup may indicate a continued correction in the share price.

tumsasedgars/iStock via Getty Images

Introduction

This article presents contrarian research for any investor considering the dedication of their hard-earned money to the shares of Facebook (FB). The article examines, each in turn:

1. Facebook's weakening competitive advantages
2. The increasingly challenging competitive environment for Facebook
3. Valuation, as assessed by comparative metrics, DCF, and EPS models

Source: Seeking Alpha

Source: MarketBeat

Competitive Advantages

An examination of Facebook's competitive advantages reveals a company, which beneath the impressive financial metrics, belies a deterioration of fundamentals. The below order represents the relative strength of one competitive advantage over another and the advantages are ranked from 1 (very weak) to 10 (very strong). Early Warning indicators are defined to help investors monitor any further deterioration of the competitive advantages year over year and thus to formulate an early exit strategy, if needed.

1. Dedicated Management and Employees (Strong Moat - 9/10)

Investors may be surprised to learn that Facebook's strongest competitive advantage is its people. The CEO, CFO, and COO, in addition to many senior managers and directors, are dedicated to the welfare, profitability, and success of the company.

I personally reviewed ~180 Glassdoor reviews and I strongly encourage any biased detractor of Facebook to do the same. While Facebook may have many questionable business practices and policies that are outward-facing, employee reviews of the company demonstrate exceptional internal unity, collaboration, agility, perseverance, a diligent work ethic, ingenuity, high emotional intelligence, outstanding compensation and benefits, and the type of work environment that fosters innovation and diversity of ideas, rather than inhibition and infighting.

Source: Glassdoor

The only real downside for employees (not for investors!) is work-life balance (high workload), the prevalence of occasional internal politics, and exhaustion from Zoom meetings (lack of face-to-face meetings due to COVID).

The culture appears to show signs of a "start-up" feeling, with some evidence of disorganization and lack of formal processes, while promoting openness (lack of siloes), autonomy (trust of employees), and targeted metric-driven results (very goal-oriented in terms of performance targets). This culture and environment might in turn explain why Facebook has run into some of the ethical, social, and public quandaries it has faced in the past decade - because the industry it exists in is lightly regulated and processes can still be eschewed in the pursuit of growth and profits.

There is very limited mention of ethical concerns by employees (even when one reviews the lowest-ranked reviews, which are usually case-by-case specific grievances and do not present any unified theme).

Early Warning(s) to watch: sudden or increasing YoY turnover in senior management, worsening YoY employee Glassdoor reviews, public lawsuits by employees against the company

2. Network Effect (Strong Moat - 8/10)

As one of the leading social networking service companies, Facebook has taken pains to grow both organically and via acquisitions its network effect competitive advantage. The platforms owned by Facebook clearly demonstrate both the appeal and popularity of social networks for consumers, businesses, and advertisers alike:

1. Facebook - Approximately 2.89 billion monthly active users as of Q2 2021. Active users are those who have logged into Facebook during the past 30 days. Facebook is the largest social media platform globally. For context, this is ~37% of the world population (estimated at 7.9 billion as of September 2021).
2. WhatsApp - Approximately 2.0 billion monthly active users as of July 2021, outranking Facebook Messenger at 1.3 billion and WeChat at 1.2 billion users. Following Facebook and YouTube, it is the third most popular social network worldwide.
3. Instagram - Approximately 1.0 billion monthly active users as of Q2 2021. At ~1.4 billion (in terms of potential ad reach) Instagram is ranked as the 4th most popular social network by number of users. Instagram is most popular in India, with 180 million users, followed by the United States (170 million), Brazil (110 million), Indonesia (93 million), and Russia (61 million).
4. Messenger - Approximately 1.3 billion monthly active users globally as of Q2 2021. 64% of people who use Facebook are also using the messenger platform. 90 million small businesses are actively using Facebook one way or another. Facebook Messenger statistics reveal that 20 billion messages are exchanged every month between businesses and customers.

As Facebook derives a stunning 98% of its revenue from Advertising, this competitive advantage serves as the lifeblood of the company. Without it, immediate growth prospects, profitability, financial leverage, and Facebook's negotiating leverage within the business world would vanish.

Source: FY Q2 2021 Earnings Call Presentation

Unfortunately, this competitive advantage is being eroded by Facebook's blunders, executional errors, competition, and by managerial tendency to overstate or embellish both metrics and future R&D prospects. Furthermore, the Network Effect competitive advantage for Facebook is heavily dependent on and correlated with the Brand and Vision competitive advantage, which is dragging down the company's profitability and weakening what should be an otherwise unblemished and glorious competitive position.

With respect to metrics, Facebook has historically presented Facebook Daily Active Users (DAU) and Facebook Monthly Active Users (MAU), with DAUs / MAUs usually sitting at a ~66% ratio to one another. Within the more recent fiscal quarters, Facebook now has adopted Family Daily Active People (DAP) and Family Monthly Active People (MAP), with the DAP / MAP ratio sitting at ~79%.

Source: FY Q2 2021 Earnings Call Presentation

Facebook has implemented these measures to entice the investment community in re-evaluating the business prospects by focusing not only on the Facebook social media advertising platform, yet on the entire family of products (Facebook, WhatsApp, Instagram, and Messenger). Reminiscent of the efforts of Apple (AAPL), Microsoft (MSFT), and Adobe (ADBE), Facebook hopes to cultivate an "ecosystem" for its product offerings and platforms.

While seemingly impressive at first look, the issue with the metrics - as with many S&P 500 companies' claims made publicly to investors - is in the footnotes/disclaimers/appendix. In the FY Q2 2021 Earnings Call Presentation, the Appendix houses a section dubbed "Limitations of Key Metrics and Other Data." In it, Facebook admits that the metrics they present to investors may be inaccurate, may fluctuate with time, and may be inherently challenging to measure - in particular the newly adopted DAP and MAP metrics.

What is striking is the distinction in the perceived error between the old set of metrics (DAUs, MAUs) and the new set of metrics (DAPs, MAPs).

Source: FY Q2 2021 Earnings Call Presentation

Despite readily admitting that the Family Metrics are much more challenging to calculate due to the use of "complex techniques, algorithms and machine learning models," Facebook claims only ~3% of worldwide MAP consisted solely of violating accounts while claiming that duplicate accounts for the Facebook metrics (MAUs, DAUs) sat at ~11% worldwide for duplicate accounts and ~5% worldwide for false accounts.

Even if WhatsApp, Instagram, and Messenger platforms had much lower rates of abuse (duplicate, false, or violating accounts) - and there is no reason to immediately suspect so when one considers the opportunities to be gained by abusing these social platforms - it is difficult to understand why the Family Metrics would have such a drastically low ~3% of violating accounts worldwide considering that:

• The Facebook platform itself, and the traditional MAUs / DAUs, constitute the largest chunk of those accounts at ~2.89 billion active monthly users.
• The new MAP / DAP metrics are by Facebook's own admission far more difficult to calculate accurately and thus one should err on the side of caution in reference to violating accounts instead of understating them.

Even further evidence of Facebook's misleading approach to metrics can be substantiated by the choice to use both monthly (instead of weekly) and daily active users to gauge the importance and success of a social platform. If one looks at daily active users instead of monthly active users, the stalwart network effect competitive advantage for each platform becomes much less apparent:

1. Facebook - ~1.9 billion daily active users or ~24% of the world population (66% of the monthly active users).
2. WhatsApp - ~1.0 billion daily active users (half of the monthly active users).
3. Instagram - ~500 million daily active users, (again, half of the monthly active users).
4. Messenger - while global statistics could not be readily located, research suggests at least 50% of US teenagers used the platform daily, and extrapolating this globally would yield ~750 million daily active users (half of the monthly active users).

The significance to investors is that depending on what set of metrics they choose to believe and to use, the underlying strength of the business and of Facebook's social platforms may be both misleading and overstated. As will be discussed in a later section, Facebook does face more competition than investors may be realizing, and this, in turn, means that a conservative approach to metrics in the evaluation of the business - rather than a sanguine one - is warranted.

Early Warning(s) to watch: any YoY loss of 5% or greater in # of DAUs, MAUs, MAPs, or DAPs in US & Canada and/or Europe, any YoY loss of 5% or greater in Facebook Average Revenue Per User in any geography, the introduction of any new metrics to gauge the success of the social platforms [which may obfuscate underlying actual business strength and results]

3. Research and Development (Strong Moat - 7/10)

Facebook spends an inordinate amount of money on R&D. For reference, at 18% in 2018, 19% in 2019, and 21% in 2020, Facebook is out-spending most of the medical device industry in terms of % of R&D compared to revenue. Allow that to sink in.

Source: Facebook FY 2020 10-K

On the one hand, this speaks to the company's focus on the future and the never-ceasing focus on innovation. On the other, one ponders the need for such high R&D spend as a % of net revenue, and given what we learned about the company's culture from Competitive Advantage #1 - Dedicated Management and Employees, one might suspect some operational inefficiencies. Nonetheless, this may be a minor and temporary issue and will present a compelling cost savings opportunity in the future as any additional product launches (if successful) reduce the need for such high levels of R&D spend as a % of revenues.

Certainly, compared to many competitors such as Twitter, Snapchat, TikTok, Reddit, Pinterest, and WeChat - YouTube and LinkedIn being the exceptions - the R&D spend presents a concrete benefit and competitive advantage for Facebook, and not one that is easily or quickly replicated.

Particularly strong is Facebook's continued focus on virtual reality (in anticipation of the Metaverse), which is buttressed by the existence of Facebook Reality Labs. That said, investors should definitely not expect any immediate results in this arena - as previously mentioned, the vast majority of Facebook's revenue comes from advertisements on its social media platforms, not from Virtual or Augmented Reality headsets or any such similar products.

Investing in a company still in the nascent stages of revenue generation and profitability for a group of products representing merely 2% to 3% of total revenues based solely on excitement or sanguine expectations for these products - and in an industry projected to have swarming competition - would be a foolish and careless mistake.

Of further concern in relation to Virtual and Augmented Reality is the way Facebook likes to generate hype about products not yet in existence (note the constant use of not actual product images. Images are strictly for illustrative purposes only):

Personally, I do not understand the purpose of hyping products not yet in existence unless to attract additional investors, and such marketing appears somewhat disingenuous and yet another blunder on Facebook's behalf.

Early Warning(s) to watch: ~3 to 6% YoY sudden decrease or increase in R&D spend without a corresponding increase in revenue, decrease in # of filed or in force patents, acquisitions, diversification or investment into areas drastically outside of Facebook's expertise or into sectors or industries with poor CAGRs or margins

4. Filing of Patents (Moderate Moat - 6/10)

In 2019, Facebook was awarded 989 patents. Most of Facebook's patents were in fields like data processing and digital transmission, but 169 patents were in the Optical Elements category. That would be related to virtual reality headsets. Facebook total in force patents numbered ~3,801 in 2019, and the company continues to vigorously protect its intellectual property.

Source: Statista

According to research conducted on JUSTIA Patents, Facebook has applied for ~7,350 patents in its existence (50 patents per page).

Source: Justia Patents

While patents are an excellent way to protect one's intellectual property, in the case of social media use cases and the software applications Facebook must employ, it is difficult to see patents preventing competitors from outright replication of features by enabling similar or copy-cat algorithms, as this can be commonplace and widely seen across digital e-commerce, website design, advertisements, marketing, workflow design, and social platforms and ecosystems.

The company's primary advantage lies in the more difficult to replicate patents granted for virtual reality, augmented reality, and optical elements, which will hopefully give Facebook the necessary head start and advantage to establish itself as one of the leaders in the blossoming and futuristic industry and thus to mitigate any existing challenges or headwinds in its traditional social platform and advertising businesses.

Early Warning(s) to watch: decreasing # of patents filed year over year, losses of lawsuits in relation to intellectual property copyrights

5. Brand and Vision (Moderate Moat - 4/10)

Prior to February 2017, Facebook's mission statement read as: "To give people the power to share and make the world more open and connected." In 2017, the CEO acknowledged the severe shortcomings and blind spots that his company's mission created and established a new one:

Source: Facebook

Notwithstanding the oft heated debates and arguments present on social media platforms, it would be remiss of any individual to argue that social media fails to bring the world closer together or that it fails in providing an opportunity (power) to build a community. As many will aptly point out, social media at times brings out both the best and the worst in human nature, when the unabashed personalities are revealed in a virtual environment.

The issues, unfortunately, are present with Facebook's notorious brand:

1. Use of the platforms for political polarization, misinformation, sensationalism, fear-mongering, and outright violence
2. Claims of social platforms being addictive and toxic to mental well-being
3. Claims of the social platforms leading to stigmas, low self-esteem, self-harm, and an overall negative impact on children
4. Federal agencies accusing Facebook of withholding key data
5. Improper use of user data as a bargaining chip over competitors
6. Illegal harvesting of personal user data of up to 87 million Facebook users, sold to Cambridge Analytica (FB fined $5B by the FTC to settle)
7. Solemn concerns over Facebook's continued use of private user data and lack of public transparency regarding how FB uses the data
8. Antitrust lawsuits and concerns, which a federal judge threw out six months after the lawsuit was filed, saying the FTC did not provide enough evidence for the claim that Facebook is a monopoly and that it waited too long to present the case. While the UK has cleared Facebook's proposed and recent takeover of Kustomer, it remains to be seen how the USA and global regulatory agencies respond.
9. Controversy regarding Facebook's policies (or weakness thereof) aimed at curbing hate speech
10. Even more importantly for investors, Facebook does not have the trust of many "creators" due to purported stealing and re-posting of content (a ~5 minute informative video)
11. Even seemingly positive attempts by Facebook to reconcile with the public and governments, such as the removal of a series of accounts that worked together to spread COVID-19 misinformation and encourage violent responses to COVID restrictions prior to the German Federal elections, are vilified.

The above are only a subset of the many issues Facebook's business and brand have faced over the past decade and since inception. The implications are profound.

Brand and Vision, as a competitive advantage, usually strengthens and drives other competitive advantages such as Network Effect, Ecosystem, or Consumer Loyalty. Yet in Facebook's case, the absolutely amazing year over year blunders by the management and the company have created a self-fulfilling prophecy: as more users learn about Facebook scandals, a growing number of businesses, users, and advertisers are beginning to hate the brand, the company, and what it represents.

Hate is a powerful word, isn't it? Yet that is exactly the types of frequent articles, opinions or comments you encounter about Facebook:

• Reasons for not deleting Facebook accounts despite hating FB / not enjoying the platform; not remembering dates for life milestones, needing Facebook to log into other platforms, wanting to use another Facebook owned app, not wanting to cut community ties, wanting to keep a digital time capsule, and needing FB for school or work - importantly, these reasons do not present major "switching costs" for users
• Explanation of why some entrepreneurs or business owners feel Facebook is no longer "worth the money" for growing their brands and companies
• Claims of Facebook losing advertisers due to the latest iOS "privacy" changes
• Abysmal net promoter scores of -47 according to a Medium survey and -21 according to Customer Guru (this means users/consumers of Facebook are detractors of the products/platforms and actively encourage others not to use the products)

One would think that the company would realize the destructive tendencies and poor prognosis for its business due to the heightened degree of enmity expressed, yet in the recent Q2 2021 Earnings Call Transcript and Q&A, it appears the CEO continues to imply that Facebook's business practices - in the latest ventures of AR, VR, and the Metaverse - will not change:

And on the metaverse points, we're primarily focused on here. Before I get into the business model, our basic playbook as a company is build products that you get to scale, especially social products. It's important that the people you want to interact with are there. So we are going to focus on having hundreds of millions of people use the metaverse and the new platforms that we're building before we really turn this into what I expect to be a very important and big part of the business. But overall, and I think that there is -- as we embark on this next chapter, ads are going to continue being an important part of the strategy across the social media parts of what we do and it will probably be a meaningful part of the metaverse too. I think commerce is going to be increasingly important, which is why we're -- one of the reasons why we're focused on this across our current apps and the current economy. But I think digital goods and creators are just going to be huge, right, in terms of people expressing themselves through their avatars, through digital clothing, through digital goods, the apps that they have, that they bring with them from place to place, a lot of the metaverse experience is going to be around being able to teleport from one experience to another. So being able to basically have your digital goods and your inventory and bring them from place to place and that's going to be a big investment that people make.

That is a lot of gaming references. If I read between-the-lines correctly, the CEO is proposing to monetize digital goods or "inventory," which any gamer will immediately tell you has no inherent or real value in the world outside of aesthetic or emotional pleasures (music, art, entertainment, paintings/pictures, video, avatars, etc.) Ethical and social considerations aside, it is difficult to envisage an overwhelming majority of people acceding to using sleek augmented reality glasses (once developed and released) while being overwhelmed with advertisements at inopportune moments and influenced to spend money on virtual/digital goods that cannot readily aid you in reality.

The only remaining and major benefit of Facebook's brand is that it is popular (or notorious) and this, in turn, draws continued usage and adoption in developing countries or areas where Facebook's social media penetration (and associated business practices) may not be as widely known. Note the growth in Rest of World and Asia-Pacific while Europe and US & Canada stagnate:

Source: FY Q2 2021 Earnings Call Presentation

Early Warning(s) to watch: any new lawsuits by consumers or regulators against the company, passage of any laws forcing interoperability and ease of data transfer from Facebook's platforms to competitive offerings, worsening YoY NPS scores

In summation, Facebook's Competitive Advantage #2 and #5 - Network Effect and Brand and Vision - face deterioration and increasingly alarming prospects, in particular for the company's brand. Investors should not ignore the disdain Facebook faces by the public - despite wonderful internal unity - as ultimately the company is dependent on future business partnerships (Metaverse) and public trust to continue making money.

If over the next 5 to 10 years the company fails to drastically amend its policies and to begin regaining regulatory and public trust, even the most amazing Virtual Reality / Augmented Reality products may falter to gain widespread adoption because of outright distrust of Facebook's privacy, policies, and actions, especially in light of possible competitive offerings.

Competitive Landscape

The part that was most startling to me in my research of Facebook is the perception by many highly intelligent investors that Facebook somehow occupies an indomitable and impregnable leadership position both in social media and the very, very young virtual/augmented reality industry. Occasionally, major risks from the growth of competitors seemed to be outright ignored or swept under the rug.

Social Media Platforms

In Facebook's traditional social media platforms (Facebook, WhatsApp, Instagram, and Messenger), there is burgeoning competition in the USA:

1. YouTube - 2 billion monthly users, $19.8B in revenue
2. TikTok - 689 million monthly users, $1.9B in revenue
3. SnapChat - 433 million monthly users, $911M in revenue
4. Reddit - 416 million monthly users, $212.5M in revenue
5. Pinterest - 416 million monthly users, $1.7M in revenue
6. Twitter - 353 million monthly users, $3.72B in revenue
7. LinkedIn - 310 million monthly users, $8.05B in revenue

...and then below are the 15 largest global social media platforms.

Source: DreamGrow

Source: DreamGrow

Respectfully, as many Facebook investors can probably grumpily attest, many of these global social platforms (growing at some very swift rates) do not have Facebook's scourge of a notorious brand and thus remain very real alternatives to consumers and users.

Conduct a simple thought exercise:

• If a consumer/user was offered all of the features of Facebook (the most dominant social platform because of the community, captured life milestones, etc.) at $10 per month on a platform that promised to a) fully protect user privacy, b) minimize unnecessary or unwanted advertising, c) prevent hate speech, misinformation, and fraud, d) promote ethical standing and goodwill with society, e) avoid especially sensitive topics (e.g. moderation on politics/religion/extremism) f) promote a true sense of community, discovery, and friendship (inasmuch as this is possible on such platforms) - how many would take that offer?

Advertising Platforms (Alternatives to Facebook)

To demonstrate how frail and worrisome Facebook's dependence at 98% on Advertising revenues is, consider the following (useful chart in the article link):

1. In the United States, prior to 2015, the digital ad space was a duopoly consisting of just Facebook and Google. At the time, Amazon (AMZN) ad revenues were relatively minuscule, totaling under $1 billion.
2. Typically known for their ecommerce business, Amazon now also makes over $16 billion in ad revenue each year (2020).
3. The vast majority of US advertising revenue in 2020 came from "Other" sources at 50%.
4. Google continues to grow its advertising business, and the industry (in the US) for digital advertising is now dubbed a "triopoly," which is a misleading misnomer considering the three largest players (Google, Amazon, and Facebook) account for only 50% of the market. Where is the rest of the spend going? Well, everywhere and to at least 10 Large Online Advertising Agencies and Networks that many may be ignoring.

This isn't an industry that's especially difficult to enter. Any company with a large enough network of users and a solid brand and reputation for privacy can host your business with advertisements.

Globally, Alibaba, Amazon, and Tencent continue vying for power with Google and Facebook. It is a surprising and remarkable testament to Facebook that it has continued to gain market-share to date despite the issues with the brand.

Source: Insider Intelligence

However - what happens if users and/or advertisers begin to abandon Facebook's platforms for competitive offerings or alternatives? Why is this considered an implausible scenario especially in light of the blunders by Facebook management and poor public relations?

Many alternatives do exist for both social platforms and for advertising platforms, and Facebook's recent new diversification to additional areas to build an ecosystem sounds - to me, personally - like a retroactive and reactive move. Consider what the CEO announced on the FY Q2 2021 Earnings Call:

I want to start today by discussing some of the themes that we're seeing and our major efforts around creators, commerce and the next computing platform. Each of these areas is important and it's going to unlock a lot of value on its own, but we're also building blocks for the future of the Internet and the future vision for our company...

So first, let's talk about creators. We want our platforms to be the best place for millions of creators to earn a living. And if we can do this within our services, we'll also have the best content across many different types of media, from text and photos to audio, gaming and video.

The second area that I want to talk about today is commerce. Our goal here is to create better experiences for people interacting with businesses and to help businesses grow even more on our platform. Our approach is to work our way down the stack and build world-class services at every layer of commerce, starting from discovery, at the top of the stack, all the way down to payments.

The third area I want to talk about is building the next computing platform. We're continuing to invest very heavily in building technology and product to deliver a full sense of presence.

But together, these efforts are also part of a much larger goal to help build the metaverse.

But it could take a lot of work and no one company is going to be able to build this all by themselves.

To put this in perspective, there are two ways to assess the CEO's promises:

1. Facebook has very ambitious goals to develop an Ecosystem competitive advantage and to become a very relevant futuristic "internet" leader in the Metaverse by leveraging its existing social networks and incipient R&D investments
2. Facebook is desperate, and in fact, it is startling it has taken the company's management so long to pivot to some of these areas (they are behind the curve here)

I strongly believe the latter, and here is why:

• There are dozens of companies catering to "creators." This is not a new concept. In addition to the various social platforms we noted, there is also Adobe (ADBE) - notably a much stronger contender to benefit "creators" and one without any sultry relationship with creators or alleged theft of content.
• There are dozens of companies catering to "e-commerce." Amazon, Adobe, Microsoft, Google, Apple, Walmart, Target, you name it... why would anyone choose Facebook over more renowned and privacy-focused brands?
• There are dozens of companies catering to "computing platforms." This involves established brands like Salesforce, Oracle, Snowflake, Palantir, IBM, Alteryx, Microsoft, Amazon, Google and again... countless others. Why would anyone choose Facebook over more renowned and technology apt leaders in this industry?

In essence, Facebook just both announced:

1. Its expected entry into at least three different industries with heavy competition, thus making it so Facebook competes in at least six industries/markets (social platforms, advertising, "creators," "e-commerce," "computing/analytics," and virtual/augmented reality)
2. Its desire to build a Metaverse and its need for massive cross-industry collaboration to build the Metaverse (despite its announcement of now competing with easily over 100 different companies, many of them in the S&P 500).

Perhaps other investors view this with incredulity similar to myself, and it is difficult to envision an eventual result that falls short of calamity unless the company retracts and amends its strategic goals to be more realistic and achievable. The new diversification appears to be a recipe for disaster - too much all at once.

Virtual and Augmented Reality

It would be remiss of me now to mention the competition in this area when so many hopes are pinned on it. As I mentioned under the Research and Development competitive advantage, Facebook's revenues from actual products sold under this emerging industry/market are miniscule. Facebook doesn't even break out these revenues separately in the 10K. It is dubbed "Other Revenue."

Competitors in this area include:

Source: Augmented Reality Companies

In fact, to demonstrate the swathe of competition, see this article listing the Top 100 AR & VR Development Companies. While not every single company might be in immediate direct competition with Facebook's own offerings (and those in development), it does demonstrate that Facebook's eventual domination and leadership in this industry is far from assured. Promising and auspicious - given their efforts to date - but not a guarantee.

The competitive landscape is precisely the reason the company is investing massive amounts into R&D to diversify the revenue streams. If and when the ads run out and revenue from advertising either stagnates - or even worse, dips - the impact to the company may be severe, especially in light of continued and growing public angst and pressure over Facebook's policies.

Valuation

A peer comparison of P/E, EV/EBITDA, and EV/Sales are applied for a comparative analysis of FB financial valuation metrics to industry leaders and competitors.

Source: Seeking Alpha

Facebook tends to rank second behind Twitter, Google and Amazon in terms of comparative valuation metrics, yet ahead of Snap Inc. Snap is valued more generously based on EV / Sales, and its GAAP P/E indicates the company has not yet reached profitability.

To determine FB's intrinsic value, a discounted EPS valuation model and a DCF valuation model are applied. Since humans are terrible predictors of the future, a reverse EPS and reverse DCF are applied to assess FB's valuation.

A few disclaimers before you review the models:

1. The models are directional only, they are not exact, and they rely on many assumptions, which can drastically alter valuation readings (thus why many investors opt to do a sensitivity analysis, yet I save time by instead using a Reverse EPS and Reverse DCF analysis).
2. I am happy to re-run the models for you with your own desired inputs if you disagree with my projections; however, I was thoughtful in the selection of each parameter/assumption and can articulate why it was chosen.

For the discounted EPS valuation model, a 5 year weighted EPS is used with growth rate assumptions of 40% for the first five years and 30% for the last five years. A P/E ratio of 25 (virtually unchanged) is assumed. A discount rate of 9.0% is applied given FB's enterprise value.

Source: Author's Own Calculations

For the DCF valuation model, a 3 year weighted FCF is used with growth rate assumptions of 20% for the first five years and 15% for the last five years. A discount rate of 9.0% is applied given FB's enterprise value. The DCF model does run for a ten-year period. For purposes of ease of visibility, only the first five years are displayed.

Source: Author's Own Calculations

In order to improve upon the above approach and to account for human error in growth assumptions, reverse Dividend and DCF models are applied. In essence, the following questions are asked: how quickly do FB earnings need to grow over the next ten-year period for FB to be fairly valued today? Is the growth rate returned by the model achievable? How quickly does FB's FCF need to grow over the next ten-year period for FB to be fairly valued today? Is the growth rate returned by the model achievable?

Source: Author's Own Calculations

For the Reverse EPS Model, FB needs to grow earnings by ~15.6% for the next 10-year period to be fairly valued today. During the past 10 years, FB grew earnings per share by 63.3% per year. During the past 5 years, FB grew earnings per share by 42.8% per year. During the past 3 years, FB grew earnings per share by 23.2% per year, with EPS growth accelerating to 64.8% during the last twelve months.

Based on such comparisons, if you believe the company can sustain a growth rate of ~15.6% for EPS (very likely) for the next 10-year period, the business is currently undervalued and provides an attractive entry point.

Source: Author's Own Calculations

The Reverse DCF Model is even more revealing; note that it is easier for companies to manipulate EPS than it is to manipulate free cash flow. FB needs to grow FCF by ~17.25% for the next 10-year period to be fairly valued today. During the past 10 years, FB grew FCF by 50.8% per year. During the past 5 years, FB grew FCF by 22.9% per year. During the past 3 years, FB grew FCF by just 11.4% per year, with FCF growth accelerating to 70% during the last twelve months. Clearly, there is cyclicity to the free-cash-flow generation and the growth rates are slowing down.

Based on the Reverse DCF Model, one would conclude fair value for Facebook stock currently (or slight undervaluation, depending on how optimistic you are regarding FB's FCF generation abilities for the next decade and associated growth rates).

Based on a holistic valuation exercise, Facebook stock appears to be fairly valued (DCF, comparative metrics) to undervalued (EPS) at the current price. The question for investors becomes what margin or buffer of safety to seek in light of the eroding competitive advantages and a swarming competitive environment.

Conclusion

While Facebook's valuation may present a compelling opportunity, there are major concerns with the fundamentals of the business and its future prospects:

1. The reliance on Advertising revenues, which can absolutely be disrupted by competitors (as evidenced by Amazon's rapid rise in digital advertising). Europe, US & Canada - the highest average revenue areas per user - are stagnating in growth.
2. The hype perpetuated by the company itself in relation to Augmented Reality, Virtual Reality, and the Metaverse, especially in light of such products only representing ~3% of revenues to date.
3. The deterioration of Competitive Advantages #2 and #5 - Network Effect and Brand and Vision. The damage to the latter is of particular significance and concern, as the CEO and the company continue to demonstrate the same principles in their business model vision for the Metaverse.
4. The ambitious and late entry into additional industries, such as the "creator" economy, "e-commerce," and "computing" despite a plethora of well-imbedded leaders and competitors in each.
5. On a shorter-term note - the insider selling and technical set-up appear poised for further breakdowns in the share price if the correction continues. For investors with high-conviction in Facebook and its future, this would present an excellent buying opportunity.

Investors are strongly encouraged to research the company further and to avoid rose-colored glasses when assessing Facebook's prospects. A healthy dose of skepticism has saved many money while jubilation has at times hurt us all.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

As always, investors are dutifully reminded to conduct their own research prior to the investment of hard-earned money into any stock, FB included. I strongly encourage you to challenge my thesis, ask questions, and to share information with all readers - this benefits all of us. If you appreciated and found this article of value, you can pay me no greater compliment than to click the "Follow" button. Thank you for reading and for engaging in the discussion, and best of luck with your investments, wherever they may be!

Comments

[PlayerOfGames]

how many would take that offer?
Lol less than 0.1%. It's all virtue signaling and horde mentality.

[Investing For The Future]

@PlayerOfGames I agree, so it would depend on if the offering / platform gains momentum. If so, I see no reason for it to not displace FB or other social media platforms - do you? People like brand new, shiny things.

[AssetMonk]

Facebook Outage is intentional, to steal media spotlight away from event whistleblower taking centerstage. Drowning news feed with - share price tanking due to outage, or poking fun on outage.... etc. are all shifting public focus to outage instead of whistleblower. This looks disconnected event but done intentionally.

When you have multiple events from same entity you tend to focus on bigger sensational one and don't bother clicking other events. PR game book then takes over painting this as wider internet rules issue.

It's not America, goal is to prevent discussion in international markets. Facebook is fully aware they can't avoid discussion in America, Outage event is successfully masking whistleblower impact filling international headlines, tv shows.

If you carefully observe the outage nature - going down 3 sites at once, which IT team is stupid enough to commit this type elementary mistake, even after with layers redundancies built in to the system?

Frances Haugen taking centerstage timing is known publicly, outage timed to soften the media blow. Discrediting and badly painting Frances Haugen is also part of another game plan.

[Investing For The Future]

@AssetMonk That might make sense based on my assessment too. FB is growing primarily internationally, stagnating in NA and EMEA, so preserving the international image is important. However, don’t you think that by doing this it will backfire? Most news articles I saw focus both on whistleblower concerns and the outage.

[Sleepless@FED]

I’m hoping FB stock price crashes back to 180$ again…will back up the truck. Addiction is the product and FB is just a platform..each of us is addicted to something or the other…we just need someone to blame for it 😃

FB is not going away anytime soon…these political dramas, whistleblowing, threat of breakup or AOC/Liz Warren running FB will continue till cows come home

[Investing For The Future]

I completely forgot to mention Discord at now ~150 million users, which is ironic considering I've actually used the app / service before. $130M in revenues in 2020.

[better investing]

Their failure would be the US success

[Investing For The Future]

@better investing Are you suggesting that FB collapsing or not existing as a business would somehow be better for the United States or a desired outcome? If so, why?

[better investing]

@Investing For The Future I would love to see them be punished for knowingly doing all the awful things since 2015 at least, surely you know what the investigations were back then and how the FBI findings were crushed/suppressed. I was ashamed to see such corruption here in America. Enough said, if you feel I’m wrong you’re probably right, most Americans could care less about rule of law or patriotism.

[Stonesfan03]

@better investing Despite appearances, I don't think the US government wants to take down FB or the rest of Big Tech for that matter; these companies wield too much strategic advantage against China at this point.

Amongst many other facets of competition with China, the US is currently competing for economic influence in Africa and other emerging markets. Meanwhile, Facebook is laying down an undersea fiber optic cable the circumference of the Earth around the entire continent of Africa to bring highspeed internet to landlocked countries. You really think the US wants to take down an American company and let China in to fill the void?

[achow1919]

Very nicely written and I think that the concerns are generally well-founded. Just a few thoughts.
1. I am not sure I agree with the comment on "stealing from Youtube" if the video is not copyrighted or protected somehow. Users in YouTube itself probably steals video content.
2. As I said the arguments regarding the perils of FB are well-founded. But I continue to get amazed at how the positives are completely overlooked. It is due to FB that many people, including me, have been able to reconnect with friends like back from KG. It is FB that allows my 84-year old Mom to stay connected and learn about her relatives around the world. She loves it. Any social interaction, even a physical one, can have negative consequences for people who are perhaps, for lack of a better term, socially challenged. So should we cancel all physical social activities? My neighbor's daughter and also someone in my family, all had issues about their appearance from mingling with their high school friends. Freedom of speech can breed negative comments - should we then stop freedom of speech? Should we stop high school then? The issue I see is that no one is talking about the hundreds of positive sides of FB - focusing only on the relatively fewer negative.
3. Billions of people use Whatapp for free to stay in touch with their loved ones around the world. Even my company is now using WhatsApp to make all international calls. Isn't that something? Should FB not be allowed to make money with advertisers so that they can make this free for us?
4. Lastly, do you think it matters or anyone gives a shit as to what color of socks I like? Do you think big brother doesn't know about pretty much everything we do? There are now cameras everywhere.....isn't it better to have some private company have some data to counter government surveillance? Finally, isn't target advertisements generally better than random advertisements thrown at the public????

[Investing For The Future]

@achow1919 Thank you for reading and for the commentary!

For #1 - it's certainly possible. Thus why I did clarify "purported," e.g. alleged theft. Certainly other social media platforms that use video have also been accused of similar theft. I know of several examples of TikTok videos that went viral being "re-posted" on YouTube.

For #2 - there are many alternative methods to communicate with friends and family and to re-connect, which is why perhaps FB's merits are not lauded as much, and certainly not as much as they might have been initially at the inception of FB. Smartphones, Zoom, TEAMS, video call / chat functionality, email, you name it...

For #3 - there are plenty of free alternatives offerings as well. I am not sure what the exact benefit of appeal of FB's WhatsApp functionality is for your organization and you? Technically speaking, it's not free. Facebook collects user and potentially business data, perhaps even without your permission, and then uses it to improve their algorithms or to market you with targeted advertisements, etc. I never claimed FB should not be allowed to make money by using advertisements - my concern is their reliance on advertisements for ~97% of revenues. As FB scandals continue, any loss of business / consumers / network users / etc. will weaken Competitive Advantage #2 - the Network Effect - and continue weakening future growth prospects. In many ways it is a self-inflicted wound.

I would contend, however, that Facebook should not be allowed to use private user data without explicit permission. This is certainly the high bar I have to face in the pharma / medical device / CRO industry - whereby anonymization of data and strict privacy laws and regulations exist - and I certainly do not see why social media or Facebook should be exempt, especially in light of their poor governance of users' data and continued questionable business practices.

For #4 - I absolutely do not think surveillance is so advanced as to have "big brother" know about most of our private activities unless concerted efforts are made by numerous intelligence analysts / companies / departments to uncover the actions or data of a certain individual or groups of individuals. If "big brother" knew everything that we're up to, far more Chinese citizens - by my assessment - would be imprisoned. As I believe China's and/or Russia's "big brother" espionage to rival if not to surpass that of Western nations like the USA, UK, or Australia, I certainly do not believe "big brother" readily or easily knows everything there is to know about each and every single one of us. Anonymization still works and exists.

Regarding government versus private surveillance - it depends on the government and on the company, no? I'd choose the US government over Facebook and Apple over the US government and Facebook over the Chinese government. It is all relative.

Agreed that targeted advertisements are better, if we need advertisements at all.

[2underpar Wyatt Oil Anthem]

I am guessing we are going to see a nice dip in FB after this trash piece on 60 Minutes with the "whistleblower" Frances Haugen.

FB is a horrible platform. But Twitter is worse. And LI is faring no better. It's all garbage.

But the scapegoating here is ridiculous. Our deficit isn't a crummy social media platform. Our deficit is effective and engaged parenting. We're raising a generation of victims. It's really sad to see this happening in America.

And I hope Ms. Haugen is held responsible for abrogating her employee agreement. Her actions were shameful.

[Investing For The Future]

@2underpar Yes, breaking news...

www.vox.com/...

[achow1919]

@2underpar Couldn't agree more.....

[luckyrichcat]

@2underpar Facebook should sue Ms. Haugen for stealing the internal documents.

People cannot steal from their company just because they don’t agree with the company’s strategy and priority.

[Sleepless@FED]

Excellent, in-depth, compelling & persuasive arguments…though markets can stay irrational longer than you can stay liquid 😆
Long FB

[Investing For The Future]

@Sleepless@FED Thank you very much for reading and for the compliment! I am glad investors long FB are finding the content and research valuable.

Note as per my disclosure I am not short FB nor do I recommend anyone to short the stock. In fact, I think that's a sure-way to lose money (e.g. shorting companies like FB, MSFT, AAPL, AMZN, etc.) and I'd only ever recommend shorting companies with VERY weak fundamentals and clearly identifiable risks that will cause further drops in the share price, and only during identified bear markets (e.g. to minimize any loss of money due to the position running against you). Ideally, the short company candidate should also lack any catalysts for price share appreciation and have a very weak balance sheet.

[Sleepless@FED]

@Investing For The Future
This market is very irrational right now...take a look at companies like Vegas based SGMS which is drowning in debt, it is technically bankrupt but the low interest rates are keeping many Zombies alive...market needs a thorough shakeout...

[Moats and Income]

Well said on metaverse:

“it is difficult to envisage an overwhelming majority of people acceding to using sleek augmented reality glasses (once developed and released) while being overwhelmed with advertisements at inopportune moments and influenced to spend money on virtual/digital goods that cannot readily aid you in reality“

When I first read their metaverse announcement, I thought ecosystem….but, no, FB envisions a significant part of their users to detach from reality and move into a gaming environment. Sorry, not happening for the masses…

[Investing For The Future]

@jmerlo Thank you for reading and for the comment! I completely agree. I am very unclear on why so many are optimistic on FB's Metaverse commitments and promises. As far as I can assess, this is still at least a decade if not two from realization and it is still very unclear if FB will be the major beneficiary of a creation of such environment (if it is fully created at all), as the CEO clearly states they will need collaboration and many partnerships to realize such a vision.

Thus, the revenue profiles associated with FB's move into this area are very uncertain at best, and I fully agree that it's difficult to see mass user adoption beyond gaming and specialized niches (airplane pilot training, manufacturing training, racecar training, safety / industrial work, etc.) Not until far better products and clear use cases are developed that will sway the masses - even then the "glasses" might pair with smartphones / digital watches.

[NV_1790]

Disclosure: Long FB.

There are so many things I disagree with this article but ill take the conclusion to highlight some of the main points

1. The reliance on Advertising revenues, which can absolutely be disrupted by competitors (as evidenced by Amazon's rapid rise in digital advertising). Europe, US & Canada - the highest average revenue areas per user - are stagnating in growth. This point fails to take into consideration the fundamental differences between Amazon advertising and FB advertising. Also, while the number of users is close to saturation in developed markets the ARPU will continue to growth as it is not restricted by demographics. Finally, while the company relies heavily on advertising new initiatives will change this over the next 10 years.

2.The hype perpetuated by the company itself in relation to Augmented Reality, Virtual Reality, and the Metaverse, especially in light of such products only representing ~3% of revenues to date. The problem here is the author fails to see who the target audience is. The audience is not the general public or even investors, the audience are prospective employees who will be working with those prototypes. This is an ad company. (See Michael abash's presentation for example)

3. The deterioration of Competitive Advantages #2 and #5 - Network Effect and Brand and Vision. The damage to the latter is of particular significance and concern, as the CEO and the company continue to demonstrate the same principles in their business model vision for the Metaverse. While there have been some surveys that mention a number of users who may be dissatisfied with the company the umber remains immaterial compared to the nearly 2 DAUs. This also applies for advertisers.

4. The ambitious and late entry into additional industries, such as the "creator" economy, "e-commerce," and "computing" despite a plethora of well-imbedded leaders and competitors in each. The author here decides to trow a number of categories and companies to see what it sticks. For example, IBM and Snowflake. While in the eyes of the author the company is late in these categories the vast majority of markets are quite early and present substantial opportunities for the company. For example, India and the Jio partnership. Finally,The company has a nearly 2 DAUs and a war chest of first party data that is unique to it and can't be matched by companies like adobe.

[Investing For The Future]

@NV_1790 Thank you for reading and for your comment! Would you be able to kindly expand on a few points for us (keeping in mind you benefit any investors considering the stock)?

1. Can you explain a few of the fundamental differences you see in FB versus AMZN advertising? Any links to articles are appreciated (if available).

Yes, ARPU can continue to grow in emerging markets, though I am unsure about developed markets. Why do you believe ARPU will grow there as well? The question still remains if the growth in ARPU both in emerging and/or developed markets will offset any decreases in the # of NA / EMEA users if the stagnation turns into a loss of users in those geographies for FB's platforms due to the Brand & Vision issues discussed.

Yes - the new initiatives will help to diversify the revenues, however I am concerned about FB's ability to execute on all of these initiatives in tandem, and as I mentioned, their entry into the new markets/industries brings them into direct competition with many established incumbents / leaders.

2. I fail to see why prospective employees would be swayed by videos of products that are not real? Prospective VR/AR/Metaverse engineers and employees are intelligent and savvy enough to have plenty of insight and ideas of their own. There are hundreds of VR/AR companies / start-ups as per my link that such employees could choose from instead of FB. FB has amazing benefits and salaries in comparison to many such companies, and a fantastic internal culture, and this would certainly be far more effective at capturing these potential employees over hyped videos.

3. The users surveyed as dissatisfied with FB's products and thus contributing to a negative NPS would most likely classify under the DAUs or MAUs, thus I am unclear on what you're implying here? Are you suggesting the number of FB detractors is much, much lower than the number of promoters / users of the products? If so, how do you explain the negative NPS surveys - too small a sample size?

4. I do not need to present anything to see if it sticks. I have no position in the stock, short or otherwise. I present existing competitors in the "compute" industry, which as of the FY Q2 2021 earnings call FB announced it will be entering in the future.

"The company has a nearly 2 DAUs and a war chest of first party data that is unique to it and can't be matched by companies like adobe."

For creators, it is the inherent brand trust and non-theft of IP by a company that is more important than a treasure trove of massive amounts of user data. While advertising and marketing to a prospective audience does play a significant role in creators' considerations, so does the implication of partnering with a company that may be seen as applying loose morals to grow and thus vilified by the society and by governments. Newer businesses in particular need to be careful about avoid bad press or publicity, even if they believe FB's products to be superior or to offer a better target / captive audience than the ecosystems / products offered by Adobe, Apple, Google, or Amazon.

[Longbow Archer]

Yes FB is reliant on Ad revenue, however, the source of ad revenue is very diversified and mostly riding the long-term trend towards eCommerce.

[Investing For The Future]

@Longbow Archer Thank you for reading and for the comment! You are not concerned by the rapid example of growth of Amazon in advertising (and this is just one competitor)?

[Longbow Archer]

@Investing For The Future Frankly no. The Ad pie is growing and there is more than enough room for an oligopoly.

AMZN is great if you sell on Amazon marketplace. If you don't sell on AMZN you are going to drive business from FB+IG, GOOGL and perhaps ROKU for your eCommerce operation.

Will allbirds advertise on AMZN? Nope. They will on GOOGL and FB however.

Also, AMZN Ad revenue has a limiting factor since the entire AMZN marketplace is geared towards products not brands so a merchant on AMZN will do product not brand building ad spend there to the extent they sell on AMZN.

The brand builders such as Casper, Warby Parker and Dollar Shave Club are looking to not just sell product (AMZN ad spend) but build a brand (FB Ad spend).

Recall for reference that FB is still increasing both revenues and market share. AMZN has grown Ad revenue at the expense of GOOGL not FB.

Lastly, GOOGL tried to take out FB with Google+ and discovered that FB has a strong, wide, deep and durable moat.

[Investing For The Future]

@Longbow Archer Yes - I am aware of Google+ failures. I am aware of numerous Google failures over the last decade because often they seem to diversify R&D spend greatly into fast growth markets / industries in an attempt to establish dominance there, and it fails, so be it... incubator / start-up styled strategy, almost, if you think about it. Invest aggressively into many high-risk high-profit areas and even if 9/10 fail, the 10th that succeeds will give such a high RoI that the other 9 failures and monetary losses are negligible.

It appears you're suggesting the key difference between Amazon and FB is due to a) product focused advertising versus b) brand focused advertising. However, my impression was that while FB certainly does a lot of brand-focused building for businesses there is also plenty for specific products as per the ads? Similarly, depending on the company / product it's not impossible to associate your company's brand with your products on AMZN. Many companies do so, and fairly successfully.

If one looks at brand focused advertising as a way of FB retaining a competitive advantage due to their approach to advertising, well there are many other e-commerce companies that specialize in this, such as Adobe, for example (e.g. they help businesses build their brands).

Also, don't you think eventually some companies / businesses will shy away from using FB for brand building types of advertisement unless FB begins actively addressing the business practice / brand issues and concerns?

[luckyrichcat]

Tiktok and YouTube are more like content platform rather than social network. The only competitor that could treat Facebook/Instagram is Snapchat.

Facebook is very hard to beat. Just remember Google Plus. And now Facebook is way bigger than 2010. Your idea about another better (perfect) social network is pretty naive.

The competitors of WhatsApp/messenger is iMessage, Wechat, Line, etc. But they are limited in some local markets.

Traffic is the king. There are many business opportunities may grow from 3B users times 40 minutes of time spent. Facebook has been focus on Ads because it is a good business with high margin but it doesn’t mean they will stop there.

[Investing For The Future]

@luckyrichcat Thank you for reading and for your comment!

Yes, FB has some of the most dominant social platforms, however there are many social network platforms as well. For example, LinkedIn certainly qualifies.

My idea about another social network is not to imply perfection or a utopian product, but rather to stress an alternate business model (charging users for use of the social network as opposed to relying on advertising) and showcasing that it wouldn't be overly difficult for a concerted and dedicated competitor to try to capitalize on FB's shortcomings and consumer/business/regulatory gripe with FB to try to launch a similar competing product with similar features and/or improvements and to thus to begin stealing market-share and users, if not at least limiting future growth prospects.

Thus, I do not see why it is naïve. Rather it is focused on the cutthroat nature of business - competitors can try to use FB's misadventures for their own benefits.

[Heisenberg View]

We saw with the old guard of technology stocks (Oracle, Cisco, IBM, DELL, Intel, Microsoft etc) that when the original industry growth prospects they were in started to stall (saturation of demand on one hand, and disruption from mobile phones and cloud computing on the other), the old horizontal market structure morphed to a more vertical market structure in many cases (often the opposite happens in industrial companies when growth stalls, they shift their focus on profitability, migrating from a vertical structure to being more focused on particular parts of the value chain). I guess the tech stocks were addicted to growth and were already hugely profitable.

These players started moving into other parts of the value chain where there was already ample competition to fight for a few more percentage points of growth, or into new fields. I was concerned by these changes, but must say when we look back a large number of those players didn't do to bad. Seems the strike rate of successful change amongst the old big tech stocks at first glance is better than for industrial companies when they try to execute a business model change. Obviously, we cannot pass full judgement yet.

Regarding Facebook, I must say I have never been a shareholder because a lot of the concerns regarding how to manage content (and responsibility for it), ability to manipulate data to affect users decision making and the social consequence of this when identified/scrutinised in public, government regulation to allow interoperability between different platforms (as we are seeing in China) were all concerns I have had for many years.

Nevertheless, I have never seen a company take as much criticism as Facebook and see such little damage to its financials (tobacco companies spring to mind, they were not bad investments over time!). Clearly it has a strong business, and the company has positioned itself well to changing trends and technology. I wouldn't sleep well shorting it.

[Investing For The Future]

@Heisenberg View Thank you for reading and for your comment! It indeed remains to be seen how aptly FB is able to execute on its commitment to creators, e-commerce, and computing. I suspect they may be taking on too much all at once and that executional challenges will emerge. We will see.

I agree that FB - like Apple - takes an inordinate amount of criticism globally and publicly. Unlike Apple, FB has a negative NPR, while Apple has a positive NPR and sports Consumer Loyalty as one of its competitive advantages. I am not so sure the same can be said of Facebook.

Not sure regarding your "shorting" comment - whether it's in relation to my article or simply to anyone reading. As my disclosure clearly states, I have no position in the stock, short or otherwise, and I do not intend to initiate one. As per my response to another commentator, shorting is very risky and a sure-fire way to lose money in most situations and should only be performed in a bear-market ideally with specified very weak companies identified as the targets. Certainly - at least for me - FB would not qualify.

[SmartReturns]

I don't think a social media site that costs money would work out very well. Most people are on Facebook to see what family and friends are up to. They are not going to switch to another platform unless their family and friends have switched. With a paid platform you are going to get less people joining and as a result less people will want to join.

[Investing For The Future]

@SmartReturns Thank you for reading and for the comment! Perhaps - then again, this business model has become a standard for SaaS / IaaS / etc. and thus many consumers are now familiarized with it.

If consumers are willing to pay monthly subscriptions for streaming services (Netflix, for example), telephone / data services (AT&T), internet (Verizon), gym memberships, food delivery services, and so forth, I am unclear on why they would be unwilling to pay for services to a well-designed site with all the necessary features for their desired social media use cases. It's all a matter of initial R&D and investment. Once designed, and if offering slightly better or equivalent features to FB and other social media websites, they users may very well try it out.

It would be a matter of publicity / advertising / free initial offerings (like SA memberships) before enough momentum is gained to fully monetize the network. This strategy has been effectively used in dozens of industries and sectors with success, inclusive of in healthcare.

$10 / month is easy to sell people on for a flashy product once 1-2 friends are trying it out and loving the features.

[Stonesfan03]

Thank you for this article. I'm a bullish Facebook shareholder but I always appreciate a fair-minded bearish article that doesn't rely on sensational hyperbole and FUD.

It's always a good idea to be aware of and keep an eye on potential weaknesses that may result in deterioration or erosion in any company that one is holding.

That being said I think Facebook has a long way to go towards any real material decline, and that any such decline would reveal itself gradually.

[Investing For The Future]

@Stonesfan03 Thank you for reading and for the comment! Yes, I agree. Any real declines will be visible well in advance, and hopefully this article will help any who read it to be mindful and aware of such changes in FB's business fundamentals or the macro-environment (for example, the continued rise of Amazon in advertising or new FB legal misadventures) to identify such changes via early-warnings well in advance of any decreases in the share price.

[Lemon Bull]

Facebook presents a great investment opportunity at a reasonable price. Its core advertising business is extremely dominate, captive and profitable but as a platform business there are a great number of developing adjacents which partly due to the negative sentiment that is always circulating the main business are not priced in. FB would only need to land or gain traction in one of these for a significant re-rating. The adjacents are too numerous to lists but to add some content, monetisation of WhatsApp, payments services, digital currency, business marketplace, other business services, VR, video streaming, gaming, revenue enhancement of Instagram…..Many of which would also be revenue diversifiers.

[Investing For The Future]

@Lemon Bull Thank you for reading and for your informative and helpful comment! I am sure both myself and other investors appreciate it.

May I ask just a few questions, if you'd indulge me?

1. Agreed that FB has a dominant advertising business (and very profitable), for now. Yet, does reliance on 98% of revenue on Advertising alone not concern you?

2. The "developing adjacents" to me appear to be a replication of the strategies by many other dominant companies in the e-commerce, compute, and "creator economy" markets. I agree that if FB pulls of the successful release of features for their platforms / networks there is ample opportunity for future growth. What I disagree on is the execution and the competitive headwinds to be faced by Facebook from existing leaders in those industries.

Why would creators choose FB over Adobe or Google? Why would companies in need of analytics / compute choose FB of Palantir, Snowflake, AWS, Google, IBM, Azure, etc.? Why would companies choose Facebook for e-commerce over Adobe's Magento, Amazon, etc.? There's so many incumbent players already... Facebook - to me - appears to be reacting, not leading here... unless I'm missing something! Let me know. I'd welcome your further thoughts.

[Lemon Bull]

@Investing For The Future
Being reliant on advertising revenue traditionally made businesses very cyclical but Facebook’s Ad revenue stood up remarkably well even during the height of the pandemic. Advertising is now essential for any business in e-commerce.

It’s reliance on advertising doesn’t concern me, businesses now more than ever will always need to target customers and Facebook has a growing user base of billions of active users on its platform.

The potential for any of the adjacents to take off is an added bonus as they aren’t priced in. I don’t see FB as needing to lead these categories. The potential for FB to successfully compete and even have an advantage over some of the businesses you mention really comes from the fact that they have both the business and their customers already in their very captive eco-system/platform, dare I say it metaverse. Very few businesses are in this position and through this FB to a large degree controls the rules of engagement.

[Lindsay-fathand]

@Investing For The Future I think what you are greatly undervaluing is the large amounts of data Facebook obtains on a huge portion of the global population. I also think you are putting way too much emphasis on people hate and distrust of Facebook. Most people just simply do not care. It is a vocal minority speaking out. If it was such an issue why do billions of people continue to use their site regularity. I would love for Facebook to diversify their revenue stream, but the advertising doesn’t scare me, my biggest fear is just a competing site that takes away a large number of active users, which in turn would turn away advertising. As long as users stays steady or continues to grow company’s are going to want to access those people with advertisements. The mataverse scares and excited me. I have no doubt that they are onto something but there is no guarantee that even with all their R&D that they will be the ones to successfully lead the charge into the future. I will not be adding anymore Facebook at the moment but will continue to hold what I own. Thanks for the article

[JB170]

"TikTok - 689 million monthly users, $35B in revenue", that's the whole revenue of Bytedance which makes it highly misleading, while they are definitely a big part of that and most of the growth. by that logic you could have placed 180B under YouTube

[Investing For The Future]

@JB170 Correct, it is misleading and my apologies. I corrected it to $1.9B for TikTok's platform specifically. Missed it in a late night proof. Hope you found the rest of the article helpful and/or informative! Feel free to let us know your thoughts on FB's future prospects. =)

[coolcatnip]

Why don't you just write a book?...FB has more levers to pull...the metaverse will have myriad applications the TAM for gain of function with AI/AR/VR can hardly be imagined, FB is merely a reflection of our pathetic species...I'm not selling!

[Investing For The Future]

@coolcatnip Thank you for reading and for the comment! I surmise you have a contrasting opinion to mine and are more optimistic about the company's future prospects. I'd be delighted to learn more regarding your opinion, especially as it pertains to FB's ability to diversify its revenues.

A few questions - if you'll oblige myself and other interested or current investors!

1. When will AI/AR/VR products be "mainstream" enough by your estimates to allow the creation of the Metaverse? Within the next decade or later?

2. When will the Metaverse be established to the point of possible monetization that drives a meaningful result for FB's revenue diversification? Within another decade after #1 or much more quickly?

3. Since FB has announced it will need to partner aggressively with other companies as it builds the Metaverse, how much of those possible revenues from #2 will go to FB as opposed to other companies?

Please note I did not encourage anyone to sell or to buy, merely to examine the risks associated with the company and to comment on this article and to challenge my thesis. As an investor, I always find well-written and well-researched bearish articles on my stock holdings beneficial. I wish we'd see more such articles on Apple.

[Ckat2Invest]

Poetic title! Thank you for the great article.

[Investing For The Future]

@Ckat2Invest Thank you for reading and for the compliment! What do you think about Facebook's future prospects? Worth buying given the undervaluation, or a wait-and-see because of the qualitative concerns discussed as well as the ongoing correction?

[youngdividend]

Where did you get Tik Toks revenue of $35 Billion?

[JB170]

@youngdividend thats bytedance(parent company) whole revenue. he shouldve clarified

[Investing For The Future]

@youngdividend and @JB170 Thank you so much for reading and my sincere apologies! It has been speedily corrected to the appropriate $1.9B in 2020 revenues for the platform itself, in part thanks to the swift SA Corrections Team! Kudos.

Thank you for catching that and let me know if any additional questions. I did proofread, however the final proof was completed late at night.