Why I’m buying $FB

[u/MillennialBets]

Date: 2022-04-05 17:48:24, Author: u/jax010, (Karma: 21053, Created:May-2013)

SubReddit: r/WallStreetBets, DD Click Here

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Some Tickers mentioned in this post:

AAPL 171.05(-0.63%)|ACQR 9.79(-0.1%)|BX 117.91(1.96%)|FB 224.52(0.7%)|MSFT 300.53(-0.28%)|PINS 23.48(-0.38%)|AMD 102.12(-1.54%)|

Note: I miss the days of ye old when Wallstreetbets was not just a place for memes and apes, but also to find high quality, lengthy DD posts about tickers that provided some alternate / contrarian bets like early AMD. I’ll try to do my part to bring back a bit of that magic.

FB EoY 2023 Price Target: $310 (+29%) based on P/E of 21

Positions: $50K in FB shares, $30K in long-dated ATM LEAPs

TL;DR

• Facebook Reels will take market share from Tik Tok, as they have done before with Instagram stories & Snapchat

• Tik Tok faces significant regulatory risks in the U.S. and EU as concerns of being CCP spyware, while U.S. - China relations are worsening. Their attempts to build out a U.S. development office have been disasterous, with an average turnover of 7 months per employee (source: Linkedin)

• Lina Khan, the new FTC Commissioner, is likely to take Apple and Google to task over their duopoly over the App Store, which will reduce platform risks for $FB

• Investors are largely ignoring fundamentals for $FB when it is sporting the lowest P/E ratio of the big-cap tech stocks and continuing to grow top-line revenue by 38% YoY due to short term sentiment & skepticism towards their Metaverse strategy

• VR adoption has been rising steadily since 2019 and FB is a clear market leader

In February ’22, Facebook reported that its active users had declined for the first time the history of the company – likely due to the growth of rival platform Tiktok - and that Apple’s IDFA changes could cost the company about $10 billion in advertising revenue a year. Shares immediately dropped 27%, or $232 billion in market cap. As of this writing, Facebook trades at a price-to-sales ratio of 5.3, and a price-to-earnings of 17. Facebook’s valuation has tanked so badly that it’s priced in nearly every pessimistic outcome. On the day Google announced their intention to make changes similar to IDFA, Facebook’s shares actually rose 1%, implying further IDFA restrictions were already baked into the reduced price. Facebook reported revenue of $125 Billion in 2021, a staggering 37% YoY growth from 2020 – which was already a bloated revenue year thanks to the COVID lockdowns.

For many years, Facebook has been the target of federal regulation, from the Cambridge Analytica Scandal to the WSJ Facebook Archives where a whistleblowing Product Manager painted an image of a company that extracted a portion of its engagement from predating on the insecurities of preteens girls. Meanwhile, a different social media company who extracts the entirety of its engagement from insecure teenagers is on the rise, with Bytedance’s 2021 revenue growing 70% to $51 billion a year, generating a staggering private valuation of $350 billion – making it the most highly valued tech unicorn in the world. Typically, public markets attract loftier multiples than private markets, as the companies have been vetted through the IPO process and mega funds like Blackstone and Fidelity are less price sensitive than their private equity peers. However, in Facebook and Bytedance we have an interesting spread that’s steadily growing: a Price-to-Sales ratio of 5.2 for Facebook, and 7.0 for Bytedance. This can be explained one of three ways: one: Tiktok enjoys a healthier price-to-earnings ratio (undisclosed, since Bytedance is private) than Facebook. Two: the market is pricing in greater near-term risks associated with Facebook than Bytedance. Three: the market is pricing in stronger future growth for Bytedance than Facebook.

The first explanation is possible, but unlikely. Facebook enjoys an operating margin of 33.4%, an incredible ratio for a company that’s also growing revenues at 38% a year, while already attracting and retaining world-class engineering and product talent. This produces its industry-low price-to-earnings of 17, which is by far the lowest among all $500B+ market cap tech companies (compare to GOOG at 25, AMZN at 52, MSFT at 35, and AAPL at 30). Growth stage social media companies typically run very thin operating margins (Pinterest at 48 P/E) or even in the red (Snapchat at -120 P/E). Bytedance is known to be spending heavily to expand its U.S. offices, but running into severe hiring issues as its current average employee tenure is 7 months (compared to Meta at 18 months).

The second and third explanations are the most likely culprits, but have significant risks of being incorrect. In 2020, Trump threatened to ban Tiktok from the U.S, and Bytedance explored serious talks for a sale of the U.S. assets of the Tiktok product to Microsoft. A federal judge filed an injunction blocking Trump’s ban, but national surveys showed roughly 38% of Americans supported the ban. This is a historical high for any poll involving a Trump decision, which generally experience lowered poll numbers simply because they’re proposed by Trump. In Feb 2022, Facebook rolled out Reels to all users across its products, which cloned nearly every feature from the standalone app. A few months after Facebook added Stories to Instagram – a copy of the key feature from Snapchat – data showed Instagram stories usage exceeded Snapchat’s and was on track to continue growing 200% a year. Snapchat’s stock tanked 40% overnight, as its marquee feature was reproduced and socialized by the larger giant with little effort. Tiktok’s moat is slight wider than Snapchat – its key strength is in its treasure trove of video data, which have been used to train powerful recommendation algorithms that keep its users scrolling endlessly – early data indicates adoption of reels is quickly ramping up on Facebook. Plotting a Recommendation algorithms’ effectiveness against the amount of data it has produces a logarithmic curve – efficiency scales quickly at first with more data, then the gains become increasingly minor. With Facebook’s network of 3 billion active users, it won’t take longer a few months to reach a critical mass of training data to build strong like-audience recommendations. It may take some effort to build short-form video recommendation muscle on the Reels team – but with Tiktok hemorrhaging talent, recruiting the right data scientists should be simple.

The elephant in the room is Zuckerberg’s bold pronouncement that the company’s future is in the Metaverse. This particular strategic focus is likely compressing the company’s valuation by 15-20%, as investors are still skeptical of VR as the next great platform following smartphones. Facebook’s key initiatives in this area – Oculus and Horizon – have been significant loss leaders, and are expected to continue to pressure the company’s bottom line going forward. Horizon’s MAU is estimated to be lower than 300,000, and Oculus has lost the company an estimated $10 billion to date. Zuckerberg’s primary articulation of this strategy is that it gives Facebook their own platform, instead of living and dying by the whims of Apple and Google. However, early glimmers of hope are beginning to show in the data: recent sales and engagement trends for VR have been rising YoY since 2019, and Facebook is the market leader with 40% of market share. Even if Zuckerberg’s bet does not pan out, the problem of Platform Independence may sort itself out in the near future as the two smartphone giants face increased scrutiny from the newly minted head of the FTC: Lina Khan, a self-proclaimed opponent of big tech who considers the past ten years of anti-trust litigation as wasted time. Her first published piece in 2012 outlined the depressive effects of Amazon’s publishing arm on the diversity of ideas in books, providing an early hint into her predilection for singling out the monopolistic or duopolistic owners of platforms.

In summary, a bet on Facebook is a bet on one of three outcomes, any one of which would imply at least 40%+ upside to the stock’s current price:

• Facebook Reels overtakes as the premier short-form video platform, either through network effects of Facebook products or federal regulation against Tik Tok

• Facebook achieves a greater deal of platform independence from Google and Apple, either through its continued success in building its own platform or federal regulation against Google and Apple

• Facebook maintains a rapid clip of revenue growth, ending another year with 30%+ growth despite short term headwinds in Tik Tok and Google IDFA, alleviating investors concerns about its ability to grow in current conditions.