Facebook

Investment Analysis Clubs Saul’s Investing Discussions
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So what’s the thinking on Facebook? Saul, are you taking a break from it because it’s going to be in build-up phase for a while, do you think you will come back to it later when it starts getting hot again? Or is it hard to say because there may be other things? Just curious how attached you are to it, or the idea of it.

Thanks,
Karen

I am holding FB and plan to hang onto it, expecting it to rise eventually, but I am feeling like I can sit on it without feeling like I’m losing out. I am curious, maybe I should consider leaving it and returning but it’s unlikely I will take that path.

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Karen,

Facebook is a very profitable company. I see their ad business growing and doing very well. I have not bought the shares though. The reason I am not buying and I will probably not buy any time soon is that there is way too much uncertainty around the enormous amount that FB is willing to spend on buying unprofitable companies. In 2014 they bought WhatsApp for $22B! They bought also bought Oculus for $2B. While FB’s profits are huge and growing fast, there’s just too much of a risk, IMO, that these acquisitions (and who knows what they will pay for acquisitions in the future) will destroy shareholder value. I’d rather put my money in companies that are growing fast and cheap (i.e. SWKS, CRTO) without the uncertainty that all those profits will get squandered on an idea that may never materialize.

Chris

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Quite aside from possibly wasting their money on these acquisitions, paying that much means a ferocious amount of goodwill on the books, so if it becomes apparent that they overpaid, there is a risk of a huge writedown which is going to go straight to the bottom line.

My other concern about FB is that there is a long history of companies achieving a seemingly unassailable position in some kind of internet service only to have everything go somewhere else not that many years later. FB does seem to have an incredibly strong position, but they also have a tremendous knack for annoying their users. I’m hardly suggesting that they are going to disappear tomorrow, but I wouldn’t be at all surprised to see someone else on top in five years doing something a bit different, which has then become the in thing to do. There are certainly more than a few annoying things about FB which I would happily leave behind.

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The $22 billion price paid for the zero revenue WhatsApp acquisition was a big red flag for me, and is probably the only reason I have not established a position. I just don’t trust their history of capital allocation.

Tom

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The $22 billion price paid for the zero revenue WhatsApp acquisition was a big red flag for me, and is probably the only reason I have not established a position. I just don’t trust their history of capital allocation.

Tom

Not sure about WhatsApp and other recent acquisitions, but Facebook bought Instagram for $1 Billion and is now valued at $35 Billion. Pretty good capital allocation…

http://dealbook.nytimes.com/2014/12/19/citigroup-says-instag…

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I hate to be the contrarian on Saul’s board, becuse I should probably stay on the sidelines, but here’s why I added to my small position of Facebook this week.

Facebook has 3 potential massive revenue generators it has yet to tap into: Whatsapp, Instagram and Oculus. I’m encouraged that they’re not rushing into anything. Taking their time to get it right will be far more valuable than rushing something to market and publicly cleaning up a mess.

When you combine the data of their 3 dominating social media platforms, Facebook will know more about you than you do. That is advertising gold that no company can overlook. Information is power, and Facebook is king.

Brad
long on Facebook

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Hi Brad,

I really like how you put it. I see this company growing at a healthy clip for a very long time. People use to talk about web presence; now people talk about Facebook presence.

I think of Facebook as the Google of the app generation. It’s reach is ginormous, it’s data on people and habits the best one can have, and it’s got a young, motivated, and engaged leader.

Anirban
Long FB, almost since its IPO. Occasionally adding bits to my FB position.

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Not sure about WhatsApp and other recent acquisitions, but Facebook bought Instagram for $1 Billion and is now valued at $35 Billion. Pretty good capital allocation…

Not so fast. Just because Citigroup says it’s worth $35B doesn’t make a true. It’s an opinion. Facebook may continue to do well and it may ultimately become the world’s most valuable company. I have no idea, but I find it hard to put my money into a company that may spend 10% or more of its market cap on another non-profitable company in the future. For those of you who own it, I hope you do well.

Chris

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Not so fast. Just because Citigroup says it’s worth $35B doesn’t make a true. It’s an opinion. Facebook may continue to do well and it may ultimately become the world’s most valuable company. I have no idea, but I find it hard to put my money into a company that may spend 10% or more of its market cap on another non-profitable company in the future. For those of you who own it, I hope you do well.

Chris

Agreed Chris valuations for social media sites in general are tough (see Snapchat), but there is no doubt that the Instgram (now one of the most popular social media sites and growing fast, outpacing Twitter) purchase was a steal at $1 Billion.

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Facebook is a growing position of mine. A few things…

1) The monetization of Whatsapp:

This Motley Fool article explained how Facebook might integrate the business-to-consumer messaging it plans for Whatsapp fairly in depth and helped me understand the model they are going for a little bit better:

When Facebook introduced Businesses on Messenger at F8, it cited possible uses for the app including answering customer questions during the online checkout flow or receiving status updates on a shipment. It could also be used to stay in touch with purchasers after they receive the item, to receive more in-depth feedback on the shopping and product experience. The addition of payments on Messenger opens the door for conducting commerce on the platform down the road, and it wouldn’t be too surprising to see similar payments functionality come to WhatsApp.

All in all, business-to-consumer messaging coupled with payments capabilities has proven a successful formula for profitable messaging apps. After WhatsApp lost $232.5 million (on paper) in the first half of 2014, Facebook needs to show that it can turn its huge investment profitable.

From http://www.fool.com/investing/general/2015/05/21/facebook-in……

I found this pretty helpful. So basically, the plan is for Whatsapp to be a one stop place for everything in the business-to-consumer model, right? Want to order and pay for a product? Check. Want to ask a customer representative a question about assembling the product or installing it? Check. Want to inquire about the shipping status of an order? Check. Want to leave feedback to the business? Check.

Remember domestic payments (including P2P) is already available on Facebook and international payments are only a matter of time.

http://techcrunch.com/2015/05/26/the-bank-of-facebook/

Steep price but definitely lots of potential here as Whatsapp is quickly approaching 1 billion users.

2) Instagram: $1 billion is a steal for the social media medium featuring 300 million MAUs and the social media of choice for advertisers’ holy grail: rich kids.

http://www.fool.com/investing/general/2015/05/02/another-rea…

CromulentBrad posted some impressive Instagram numbers the other day on Facebook’s board and I hope he doesn’t mind if I post them here:

300 million monthly active users
75 million daily users
20% of global internet users between 16-64 have an Instagram account
23% of all teens consider Instagram their favorite network

Instagram is an advertiser’s dream come true. Never before have you had this many kids (most of them “well off”) that are so engaged with a medium.

3) Facebook Messenger: Facebook recently announced it wwishes to bring games to Facebook Messenger. What will the future look like for Messenger?

Facebook’s long-term goal is for Messenger to evolve into a monolithic chat app like Tencent’s WeChat (known as Weixin in China), which has 549 million active users. Last year, Tencent let retailers set up “mini shops” within the app and launched a “Game Center” for in-app installations of games. Last quarter, Tencent reported that gaming revenue from WeChat and its other chat platform, QQ, boosted its online gaming revenue by 28% annually to $2.15 billion.

If Facebook can mimic Tencent’s WeChat strategy, it could monetize Messenger’s massive user base. The Messenger app would be used for chat, payment, gaming, and e-commerce services, just as the main Facebook app is used for photos, videos, status updates, and sharing links.

http://www.fool.com/investing/general/2015/05/23/facebook-in…

4) Oculus: As far as Oculus goes, I can only point to potential, not users or subscribers or advertisers. But the possibilities sound pretty awesome:

You’re in your chair at home, the latest Oculus VR headset encircling your head, and you use its voice recognition feature to access Facebook.

Facebook’s virtual reality newsfeed appears in front of you — a three-dimensional, horizontally-scrolling wall of cards. Each card contains a virtual experience, and much like the auto-playing videos in Facebook’s newsfeed today, each of them offers a few moments of the experience on a loop.

The first card is from one friend, who uploaded a video (filmed with a consumer-friendly VR camera) featuring her three-year-old daughter and the family dog chasing each other in circles. It’s cute… and not what you’re looking for.

Instead of using a mouse or a finger-swipe to scroll through a flat, one-dimensional newsfeed, you lift your arm and make a swiping gesture to the left.

The next experience in the queue is from your best friend, who uploaded a clip taken from his video-drone’s flight over Manhattan at dusk.

With the drone’s multiple cameras capturing three dimensional space and the VR editing software that came preinstalled on Apple’s latest desktop devices, you’re witnessing a virtual experience of the most awe-inspiring parts of its journey.

http://techcrunch.com/2015/03/15/facebook-oculus-and-the-fut…

Missed a family reunion or wedding or other important event? Now you can relive it as if you were there when your friends/family members post it on Facebook. Or experience sailing with your friend or racing a car or anything else one of your Facebook friends post.

Now obviously not all of these plans Facebook has might pan out. I get that. And while I think Oculus and Instagram were not that expensive for the potential rewards they bring, Whatsapp definitely was pricey. But I just wanted to point out Zuckerberg and his crew have detailed plans for everything they’ve purchased. They’re not just paying big bucks for a random assortment of popular web platforms and technologies. I believe Facebook is a great stock to own right now.

  • Matt
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So what’s the thinking on Facebook? Saul, are you taking a break from it because it’s going to be in build-up phase for a while, do you think you will come back to it later when it starts getting hot again? Or is it hard to say because there may be other things? Just curious how attached you are to it, or the idea of it.

Hi Karen, Yes, Yes, and Yes:

Yes, I’m taking a break from it because it’s going to be in build-up phase for a while. I sold out at the end of April because it seemed earnings weren’t going anywhere soon and neither was the stock. I sold at an average price of about $80 and it closed yesterday at $80.55 while my portfolio on average has done much better.

Yes I may come back to it later when it starts getting hot again? But that will depend on circumstances. Or is it hard to say because there may be other things?

Just curious how attached you are to it, or the idea of it. I do like the company but I can’t be in everything and have to pick what seem to be the best for now.

Saul

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Hi Chris and tamhas, I’m not particularly worried about the acquisitions and the goodwill. If things turn out well and they start making money I’ll likely buy back in, but I’m on the sidelines now. (Adjusted PE is 44.5. The rate of growth of earnings I’m anticipating for the year 20% to 25%. That gives a forward 1YPEG of about 2.00 (very high). I’m using a forward looking rate of growth as they have made clear that this year will be different, with more expenses, and thus a lot slower growth).

Saul

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I hate to be the contrarian on Saul’s board, becuse I should probably stay on the sidelines, but here’s why I added to my small position of Facebook this week. Facebook has 3 potential massive revenue generators it has yet to tap into: Whatsapp, Instagram and Oculus. I’m encouraged that they’re not rushing into anything. Taking their time to get it right will be far more valuable than rushing something to market and publicly cleaning up a mess.

Hi Brad, I’m sure it will work out for you as FB is a good company. It may just take a while.
Saul

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Yes, I’m taking a break from it because it’s going to be in build-up phase for a while. I sold out at the end of April because it seemed earnings weren’t going anywhere soon and neither was the stock. I sold at an average price of about $80 and it closed yesterday at $80.55 while my portfolio on average has done much better.

Karen, I just looked back at my end of the month summary for the end of April. I was up 20.0% at the time I wrote it. I’m now up 31.2%, so my entire portfolio is up 11.2% in the past month, and FB hasn’t budged. That’s why I’m not in it. Not that it’s going to crash, just, as I said, that it doesn’t seem that it’s going anywhere for the time being. I definitely keep an eye on it though.

Saul

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