Facebook Deep Dive (Multi-Part Series)
Facebook Deep Dive (Multi-Part Series)
Part 1: It ain't what you think it is
In this article:
“Meta” means the whole company
“Facebook” means the actual Facebook app
It has become strikingly clear since Meta’s earnings that most people have no idea what Meta actually is - especially when it comes to the Facebook app itself. Specifically, people don’t understand three things:
What its products are
Who its users are
Why its terminal value risk is very low
The first part of this post will address the three issues above.
In my second post I will address Meta’s privacy/PR problem. It has been obvious for a long time that people don’t understand the dynamics that are currently plaguing Meta. Specifically, people seem not to recognize that Meta’s privacy/PR problem is primarily a result of two factors:
A coordinated attack by entities with opposing interests (to Meta’s) who coincidentally find themselves allies (they are certainly not allies because they share a moral viewpoint). These entities are using privacy as cover to conduct what is essentially a coordinated psyops campaign against consumers in an effort to win market share and maintain power.
A phenomenon as old as written history itself, and as reliable as the setting sun: The battlefield on which narratives fight for mindshare has been forever altered by social media. As with every time in history, chaos ensued.
This is very different and far less dangerous to Meta’s long term success than if the privacy/PR issues were driven by a grassroots consumer movement against advertising. Consumer driven movements have far more staying power than smear campaigns orchestrated by entities with obvious conflicts of interest.
Four examples prove my point, and I will do a deep dive on number 1 and 4 below in Part 2, citing the sources so you can read and determine for yourself whether I am being hyperbolic.
Apple: Apple does not care about privacy, and I will use their China policies to prove it. Their “Privacy” campaign is purely profit driven. The Chinese Communist Party (CCP) has but to ask, and they will be given whatever information is on the iPhone or iCloud account of any user in China. Why? Because the way servers are currently set up in China, Apple wouldn’t even know if the CCP took information off of an iCloud account.
Media: Obviously the media hates Facebook - it competes for advertising dollars and Facebook has become the primary mechanism through which their content is discovered. They’re losing power and dollars to Facebook, of course they despise it.
Politicians: Political parties each have their own media. Republicans have Fox News and Talk Radio. Democrats have MSNBC and CNN. But the one thing politicians hate more than the other sides’ news media is for people to be able to share their own content outside of established channels.
Historical context: I will point to examples including the invention of the printing press and the radio that illustrate why Facebook has become such a lightning rod.
I want to stress two things.
First, I have only one objective here, which is to explain why Facebook is an attractive investment from a risk/reward perspective. I can’t do that without addressing the above issues.
Second, I’m a libertarian who loves a good fight, and may the best person win! I have no moral qualms with the psyops operation Apple is running. It’s not something I’d be willing to do myself because the level of hypocrisy Tim Cook is required to engage in on a daily basis would give me cancer. But that’s a me thing. Examples of hypocrisy abound in the business world and my role in life is not to judge, it is simply to try and understand the true underlying dynamics that impact my investments. In full disclosure, when I saw how effectively Apple was orchestrating a brazen anti-consumer land grab and keeping the narrative focused on Facebook’s invasion of privacy, all the while literally handing the keys to their China castle to the CCP - I bought more Apple stock! Apple was making a bold move, and it was and is being brilliantly executed.
In my third post I talk about the absolute beast that is Instagram. Below are Instagram’s user growth figures just to wet your appetite.
Before I begin let me say one thing about the recent earnings report specifically and investing generally.
If Meta was just another social media company - or worse - nothing but a highly addictive online/mobile destination for passing time like (*gasp*, TikTok) - then I would be better able to understand the reaction to the stock after reporting declining users and revenue growth. However, even if Meta was nothing more than a gimmick to pass time the valuation is reasonable. But Meta is nothing of the sort, and the valuation is insane. This gets me super excited because the biggest money to be made for long term investors is when two things are occurring simultaneously:
The market is punishing a stock for a widely understood reason
That reason is wrong
If you hold a stock and don’t have any idea why it is going down, watch out! There may be something you don’t know which is very justifiably tanking your position. However, if you know exactly why the market is torturing a company in your portfolio - but - you also think the market is completely wrong - this is where the best risk reward setups happen. Some historical examples:
Apple is just a phone company
Microsoft is just a PC company (circa iPad launch)
Nvidia just makes commodity graphics cards
Tesla will never be able to produce at scale (or build a profitable car for that matter)
Meta today is terribly misunderstood by the market. While I don’t expect Meta to have a run the size of any of the above 4 examples - that is simply because the above runs were ones for the history books. Meta could still have a huge run though, and the risk vs reward at these levels is better than anything I’ve seen since the Covid crash. If I’m wrong, I see very little downside from here. Big potential reward. Little potential risk.
One quick note on TikTok before diving in to the Blue App. My research in writing this series has led me to conclude that TikTok is Meta’s biggest threat by an order of magnitude - but not because of what the app is in its current form. Rather, it’s because the TikTok inside of China - known as Douyin - is a super app with many features that have become successful. Unlike Snapchat and Twitter, the parent company of TikTok - ByteDance - has proven itself capable of using TikTok (as we know it in the west) as a stepping stone to get into long form video, messaging, ecommerce and more - at scale.
Meta’s Products: the Facebook App
Information was taken from a Hootsuite presentation:
Total population of Earth: 7.91 billion
Total number of internet users: 4.95 billion
Number of internet users in China: ~1 billion
Number of internet users Ex-China: 3.95 billion (Meta’s total addressable market)
Facebook daily active users (just Facebook, not including Instagram etc): 1.929 billion (48.8% of all internet users ex China)
Facebook monthly active users: 2.912 billion (73.7% of all internet users ex China)
Facebook is also far more international than most people realize, and most Facebook users do not have an iPhone. The below chart shows the top user counts by country.
Facebook is more than the primary feed. There are four additional mega-apps within Facebook. But let’s talk about the feed first.
Mark Zuckerberg has famously said that “there are a limited number of social mechanics”. He’s right. Since the beginning of social media, no company has ever successfully replaced the news feed mechanic. Twitter, Snapchat, Instagram, and now TikTok all invented new mechanics. This is important to understand because the terminal value equation is different for Facebook if there is a chance of it eventually going to zero. The best analogy I could come up with is the drinks industry. Coke and Pepsi are not going away, even though they will lose share over time to new beverages. The past twenty years have seen many changes in tastes, a move toward healthy beverages and bottled water, and the introduction of energy drinks. But plain old Coke and Pepsi are still here, and they will probably be here in 50 years even if their share of total beverage sales has fallen. Facebook very well may lose timeshare to other apps, or anything else for that matter. But it has a monopoly on the news feed mechanic, and that is worth a lot.
I’ll also point out that the data around younger users not using Facebook is not as alarming as it may seem. Facebook has morphed into a very different product than it used to be - one that is far more stable and defensible - but which is not as useful (or addictive) to people in the earlier stages of life. This is normal, expected, on-purpose, and totally fine. And…Facebook will get these users as they get older.
To be sure, Instagram DOES need to worry about these younger users - and it is - and the results are impressive. We’re not going to talk about Instagram now, but here’s the chart on their demographic base to tide you over:
Note that over 70% of it's users are under 34 years old.
But we’re talking about Facebook now. I’m not sure its fair to Facebook to compare it to Coke and Pepsi when it has been so effective at creating additional products within the app. Let’s go through them now.
#1 Facebook Groups
According to NYU, Facebook Groups has more than 1.8 billion monthly active users. There are more than 70 million admins running active Facebook groups. The top ten groups are:
1. Deepika Sharma (7.9million members)
2. Our Evergreen Bangladesh (6.2m)
3. Makeup Artists (4.9m)
4. Kersh Keepers (4.4m)
5. Cheap Meal Ideas (4.1m)
6. Pray Until Something Happens (3.9m)
7. Maths Formulas (3.6m)
8. Netflix Recommendations (3.3m)
9. WWE Monday Night Raw (3.2m)
10. Pantsuit Nation (2.9m)
I found the following statistics regarding Facebook Groups’ growth:
Users in February 2017: 100 million
Users in April 2019: 400 million
Users in February 2021: 1.4 billion
Users Now: 1.8 billion
As with the newsfeed, it is unlikely that any company will replace Facebook Groups. Nextdoor, the neighborhood group app, reported on August 12th, 2021 that “global Weekly Active Users increased 5% year over year to 29 million”. Compare that against the numbers you see above. Again, what is the terminal value risk of Facebook Groups?
#2 Facebook Marketplace
Facebook Marketplace is the largest ecommerce platform outside of China by user count. It has more users (1 billion+) than Amazon, all Shopify Stores, Ebay and Craigslist combined. 71.3% of its users are under 44.
People are using Facebook Marketplace to buy houses, rent apartments, buy cars, and get rid of old junk. I have personally met many people who run entire businesses on Facebook marketplace - from property rental to rehabbing furniture. Facebook launched Marketplace in 2016, and by 2018 it had more than 800 million users, and now has more than 1 billion users.
Again, what is the terminal value risk of Facebook Marketplace?
#3 Facebook Gaming
Facebook Gaming has more than 350 million monthly active users. In Q3 of 2021, Facebook overtook Youtube in terms of total hours watched of game streaming.
Hours streamed on Facebook gaming increased from 269 million to almost 1.3 billion in two years! Facebook gaming has slowed recently, but regardless it remains an example of Facebook’s ability to use their platforms to launch things very quickly at scale.
#4 Facebook Shops
Facebook is third only to Amazon and Shopify (outside of China) in terms of merchants selling through a storefront on their platform. They have over 1 million businesses (vs. Shopify at 1.7m) selling on Facebook. 250+ million people browse these stores every month.
In China, social commerce users reached 780 million in 2020, and total purchases through social mechanics equaled 2.3 trillion yuan or more than $360 billion. If anyone is well positioned to take advantage of social shopping - it is Facebook.
Let’s revisit the three things people misunderstand about the Facebook app:
What its products are
Who its users are
Why its terminal value risk is very low
It’s products are more diversified than anyone realizes. There are a myriad of reasons for someone to log into Facebook - and people do. Each of the core products on Facebook’s main app are not only successful, but completely dominating their respective spaces. Facebook chose to morph its main platform into a tool with broader utility. This has reduced engagement, lost the young folks, and sacrificed profit in return for ensuring that Facebook will be around for the long haul, perpetually capable of serving as a platform from which new products can be launched.
Facebook’s user base is incredibly international. Most users are not from the US, Canada or Europe. Most users do not have an iPhone. Facebook has proven itself capable time and again of creating products with monopolistic moats in their respective spaces.
And as to monetization? Look at the above growth rates. Facebook hasn’t even begun to figure out how to monetize their asset base. They grew too fast. And by the way, they’ve managed all of that growth in user count and diversity of activity on the platform while simultaneously fighting one of the most epic psyops campaigns of all time, and that’s what we’ll look at next.
So what is the terminal value of Facebook? A Fuckton.