Grant's Interest Rate Observer,

A Warning to Facebook Bulls

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You certainly can’t call them Pollyannas.  In recent months, a number of higher ups at Facebook, Inc. have issued eyebrow-raising comments which seemingly call into question the value of social media itself.

 

This morning, global politics and government outreach director Katie Harbath wrote on the company blog: “From the Arab Spring to robust elections around the globe, social media seemed like a positive. The last U.S. presidential campaign changed that, with foreign interference that Facebook should have been quicker to identify, to the rise of ‘fake news’ and echo chambers.”  That post is hardly the first display of public angst from prominent current employees and alums alike.  On Dec. 15, director of research David Ginsburg penned a blog post asking: “Is spending time on social media bad for us?”  In November, former vice president of user growth and current Social Capital CEO Chamath Palihapitiya commented during a talk at Stamford Graduate School of Business that: “I think we have created tools that are ripping apart the social fabric of how society works.”

 

It’s not just words. Facebook C-suite has been voting with its feet.  In the golden wake of a 501% run-up in its share price over the past five years, company insiders have hit the bid en masse.  Last September, CEO Mark Zuckerberg announced a plan to sell between 35 million and 75 million shares through the spring of 2019, in order “to fund the philanthropic initiatives of Mr. Zuckerberg and his wife, Priscilla Chan, in education, science and advocacy” according to filing made with the SEC.  That equates to between $6.5 billion and $14 billion at the current price.

 

As those who know the company best have made ambivalent public statements while methodically divesting their holdings, passive investors have happily snapped up the supply.  Facebook’s top five shareholders in the non-voting class-A stock, Vanguard Group, BlackRock, FMR LLC (nee Fidelity), State Street and T. Rowe Price, hold just under 25% of shares outstanding.  The indexers’ ownership has likewise grown commensurately with Facebook’s surging market cap:  Vanguard’s current 166 million share stake compares to 26.3 million shares as of year-end 2012.  BlackRock’s 141 million shares compares to 22.7 million on Dec. 31, 2012. 

 

Wall Street remains steadfastly bulled up, with 42 sell-side analysts rating Facebook shares “buy,” against three hold ratings and a pair of sells.  One of the skeptics, Pivotal Research Group’s Brian Wieser, noted  on Jan. 12 that time spent per-user on the site slowed notably over the summer.

 

Facebook (including Messenger but excluding Instagram) saw a decline in total person-hours (number of users multiplied by hours of consumption per person) during September of -0.1% year-over-year following a -0.9% decline in August. This represented a decline per user in each period as the unique audience on Facebook rose by +7.8% in August 2017 and by +4.7% in September 2017. Specifically, core Facebook saw a decline in time spent per user of -7.0% and -4.7% in those two months. 

 

Last Aug. 11, Grant’s produced a skeptical analysis of Facebook (“Concerning Mark Zuckerberg”), while giving full credit “to the world beating success of the Mark Zuckerberg/Sheryl Sandberg enterprise,” as well as its pristine balance sheet, fat operating margin and spectacular share price performance. Facebook and Alphabet, Inc. (the parent company of Google), which combined took in 20% of worldwide advertisement spending (and 60% of the digital variety) in 2016, may be bumping up against the gravitational limits of their addressable market. That would render them more conventional advertising companies, subject to the cyclical limitations of that industry and potentially, stingier earnings multiples which would accompany moderated growth prospects.   The comparison to another blue-chip investor darling in the 1990’s loomed large:

 

Coca-Cola Co. was a seemingly invincible, world-conquering growth stock 20 years ago. Roberto C. Goizueta, a CEO out of the Lord of Creation mold, liked to talk about “our virtually infinite opportunity for growth” (the italics were his). “To listen to Goizueta,” said the issue of Grant’s dated Oct. 11, 1996, “the stockholders face no meaningful risk from any contingent event because all relevant outcomes are under the control of the board of directors.” Somehow it never occurred to the bulls that a meaningful cohort of consumers would one day decide that they would rather drink water. The Coca-Cola share price peaked in 1998 and spent the next 16 years in growth-stock perdition.

 

Some unsolicited advice to the legion of Facebook bulls:  Perhaps it is a good idea to pay attention to the actions, as well as the words, emanating from the company’s Menlo Park, California headquarters.