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By Chris Bailey | Thursday 26 July 2018
Disclosure: I 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 (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Let's start off with a confession...I am actually not on Facebook (FB in the US) and have actually no real interest in ever getting a profile. Perhaps that makes me an unsociable Billy No Mates...or maybe it makes me a trendy young thing, aware that the creation of Mark Zuckerberg is looking a bit shabby around the edges after a last year full of privacy challenges, embarrassing Congressional testimony, two fingers to House of Commons committees and share sales by a certain M Zuckerberg. More on all this in a second. The reason why today I am ignoring the bevy of large cap UK listed stocks that have reported is because the most fascinating move in global markets over the last 24 hours was the after hours 20% plunge of Facebook shares post its quarter two numbers disclosure.
Now this matters at so many levels. The first is related to big picture stock market levels. If you have a look at stock market returns over recent years, the complete love-up of technology stocks has been a huge contributor to the general appreciation we have seen. And in the vanguard of all this has been Facebook, a company with more profile members than China has citizens. As with any high excitement epoch, the last year or three has seen a building number of investment 'experts' observing that if you did not hold Facebook or Amazon or Netflix in your portfolio then you were some kind of antediluvian fool.
Well something has changed. In the last week both Netflix and now Facebook have disappointed the tech lovers with their guidance on new members/revenue growth and very importantly their ability to generate cash - that most fundamental and old school of investing concepts. Dispassionately valuations got way too hot and suddenly the greater fool who was happy to hoover up the shares is not quite so excited. And the investor at the margin really does matter because my observation is that way too many institutional investors have loaded themselves up to the gills in such names on the basis of business and career risk. In such it is a hugely crowded trade. You can bet there will be some excitable conversation in investing boardrooms across the world today in the light of the share price plunge.
The harsh reality for Facebook is that it is caught a little bit between the devil and the deep blue sea. It has been rightly raked over the coals on issues such as privacy over the last year, hence the 'cuddly' TV adverts it has been running over recent weeks, talking about simplifying its service and highlighting just how much it cares. Well the genie is out of that bottle already. The other challenge is that trying to become cuddlier and cracking down on fake/weird news on its product costs money. Additionally that 'monetisation push' (i.e. more adverts) is hacking more people off. I find it kind of fascinating that when I met with the largest Chinese competitor to Facebook just over a year ago, it said to me that its advert intensity was only a tenth of the US name.
Young people increasingly also do not do Facebook. I admit that another one of its assets - Instagram - is very popular but this is nowhere near as remunerative. And as for WhatsApp - which I do use - that is basically a complete freebie. So you have an ageing and increasingly hacked off user base who you are progressively struggling to sell more adverts to, in a world which is losing faith in buying your shares at inflated multiples. That's not a good combination.
I expect a bunch of brokerage institutions today to reiterate their shabby-around-the-edges views and try and rally the stock. However, my guess is that structurally it is Fadebook time. Over owned and too much in your face. It is time to cut the corporate hubris, start working to re-engage and re-inspire on issues such as privacy. Maybe this includes an evolution of management at the top. Mr Zuckerberg is going to be hurting today in terms of his net worth but he is never going to starve on the streets. And those share sales? A regular occurrence now to help fund his Foundation...and get some money out.
Put it all together...Facebook is Fadebook. Don't believe the brokerage hype and, in my opinion, if you own it you should still be selling it. Suddenly the world of sensible valuations and dividend yields looks again that little bit more attractive when picking stocks. That matters for all investors.
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