Deep Dive on Facebook

Tuesday, Feb 5th 2019


Meet Facebook##

  • The media seems to believe the social network’s reputation is forever tarnished, a fatal blow resulting from a “growth at all costs” mentality that’s persisted for years.
  • Meanwhile, some of the world’s best managers have called Facebook “the best business model ever created” — one that will endure through its growing pains.
  • Which camp will win? We strongly agree with the latter. The media firestorm seems overdone. As it normalizes in coming years, we believe the quality and resilience of Facebook’s business will prove out.

Elevator Summary##

  • Facebook has one of the best business models in the world. In some ways, it operates like a classic media company that provides content to users and collects advertising revenue from businesses who want to reach them.
  • What’s unique is that Facebook doesn’t have to spend money on content - users provide that content for free. Put differently: imagine you could charge for lemonade without having to pay for lemons. Incredible.
  • We believe the company has strong network effects and pricing power, resulting in a wide economic moat that gets stronger as it grows and helps Facebook fend off competitors.
  • Headlines misunderstand that Facebook is still just getting started. We think it only has 5% market share of potential sales & marketing dollars, plus huge revenue potential from Instagram and WhatsApp.

Our Contrarian View##

  • Sentiment seems extremely negative on Facebook today, as security and privacy issues have plagued the company.
  • We think most people forget that Facebook has some of the best infrastructure engineers in the world to fix its security issues. We believe they can and will.

  • We believe the media assault on Facebook has created a rare opportunity for investors to join the journey of one of the best businesses ever, at a discount. Near its all-time low valuation, the stock appears attractively valued for long-term investors.

Read the Deep Dive##

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