Facebook (FB): Bear Case Summary

Parent company of names like Instagram and WhatsApp, Facebook (FB) is an esteemed member of the FANG club. The hugely popular social media company successfully generates FCF by selling ads against the significant user-generated content (UGC) traffic generated by billions of active FB users. In addition to generally rising digital advertising penetration, FB monetizes the captive user data to its advantage.  That’s why the stock is hugely popular among hedge funds and investors. Actually Facebook ranks #3 among the 30 most popular hedge fund stocks. So it grabbed our attention when we came across a bearish thesis on Facebook written by The LT3000 Blog. Here is a brief summary:

Perception of sustainable high growth rate with low risk owing to durable structural drivers, has made FB a darling for both growth and value investors alike. Here are a few legitimate concerns about the survival of FB’s earnings growth.

(1) Number of users: Despite steady growth in its DAUs/MAUs, FB has already captured the vast bulk of the world’s high-value users with affordability of smart phone, access to internet and high budget for products and services advertised on its online platforms.

(2) Amount of time spent: As social media, gaming, streaming and many other apps vie to share the limited 24 hour-a-day time of the user, his/her attention is bound to be divided. The attention saturation will eventually turn every new platform cannibalistic at the cost of success of another, rather being additive to the overall attention industry. This could very well lead to a vicious cycle of fewer visits, UGC, less frequent visits (and scrolling dwell-time), as there is less UGC to consume, leading to even less visits, etc.

(3) Cyclical industry and over capacity: As the advertisement industry is notoriously cyclical, the backdrop of incremental technology infrastructure (supply) growing faster than decreasing user visits (demand) could force FB to become yet another name in the long list of similarly failing companies and industries over the past century.

(4) Unicorn bust: In the event of a virtually inevitable VC/Unicorn bust, unlike Alphabet (GOOG), which has valuable and reliable iCloud business, FB’s could be vulnerable to a serious dent in its revenues.

Therefore, a deep long position held by investors confronted by a slew of dangers indicates that a permanent growth in FB should not be assumed. This doesn’t mean that you should short Facebook, but definitely avoid a long position here.