Why Facebook is a huge short

“Hey Julia, what are you up to? Facebook?” I said to my 20-year-old nephew.
“No way,” she said. “I’m on Instagram.”
“Why no way? Anything against Facebook?”
“Nah. I’m checking my Instagram, and responding to some Snapchats.”
“No Facebook?”
“Facebook’s done. I use it to find people, but I rarely log in anymore. Nobody does.”
I’m getting old…
“Why’s that?”
“I don’t know… Too many people - I’ve got 750 friends or so… - too many of those Farmville games… too many random posts.”

Facebook is, IMHO, a huge short opportunity. Here’s why [1]:

Weak business model: people forget social networks are a fickle business. Myspace and Orkut were huge. Brazilians and Indians spent comparable amounts of time on them as people spend today on Facebook worldwide. Both vanished, in a matter of years. Just disappeared. Why? Customer taste, herd mentality, whatever [2]. People like new things, and they’ve shown how so, by adopting Instagram, Snapchat and other apps as their main go-to social thing. Will people close their Facebook accounts? Probably not. But engagement is going to fall sharply in the US, then Europe, then Asia, then on the rest of the world, as it rises across other platforms and apps. And this cycle will probably repeat itself ad infinitum, as long as humans are humans. Why that order? Because that’s the order Facebook grew popular in. First the US, than Europe, than developing markets. It’s probably already happening, and not visible in MAU and DAU metrics.

Weak strategy: Since social networks are fickle and Mr. Zuckerberg’s not dumb (Sheryl isn’t either,) Facebook’s been buying other properties to diversify its portfolio. WhatsApp and Instagram are prime examples. It’s a dodgy strategy for two reasons:

i) Facebook will either run out of cash or dilute its shareholders to nothingness if it keeps paying top dollar for the competition. As a Facebook shareholder, I would rather invest in Sequoia Capital, or Kleiner Perkins, and hope for the best (paying 2/20,) than pay Mr. Zuckerberg top valuation (45x consensus earnings) for him to pay a second layer of top valuation (infinite x earnings) for other nascent apps. In this dumb setting, shareholders are being screwed squared.

ii) Past acquisitions show that Facebook is quite desperate. Paying almost $ 20 billion is too much for almost anything in the world. Paying almost $ 20 billion for a messaging app? Paying almost $ 20 billion for a messaging app when Facebook has its own messaging app (proving that the technology itself is worth nothing)? Last, but not least, paying $ 20 billion for a messaging app that according to Facebook itself “we currently monetize … in only a very limited fashion, and we may not be successful in our efforts to generate meaningful revenue … over the long term?” Of course there’s a ridiculously high risk WhatsApp will generate almost no revenues. It has basically promised its users to never EVER fill their screens with ads, when Facebook’s strategy’s been built solely on top of advertising. A paradox, at best.

So what’s in it for Facebook, long term? I’ve read something this week that really stirred me up. Somebody said something about Facebook becoming Yahoo in a few years. I couldn’t agree more. Investors are going to realize Facebook is a greater fool’s stock, and penalize it heavily. Multiples are going to melt, taking the stock price with them. Facebook won’t be able to pay this level of top dollar for trendy apps, and so will become kind of an internet utility, used for messaging, like some funny kind of Yellow Pages online. Want to find somebody, and send over a message? Go to Facebook. And that’s it. And people will continue to flock like herds to the next next thing, which will be Instagram, than Snapchat, than some other goofy app, forever and ever, and maybe in 20 years, we’ll fully sort out this social networking business model. By then Facebook will be gone.

Investors have to be reminded over and over again that Mr. Market is pretty crazy, and that the internet, as Jeff Bezos likes to say, is on its day one. Facebook is a decade old. We don’t have a clue if it will even EXIST in another decade, just like so many companies in the web/tech space (and even in other real-economy spaces) have gone. So think thrice before paying 45x earnings for Facebook stock. It won’t sustain those levels.

Oh, and by the way, how much would I pay for it? I would buy at 4x earnings. And sell at 8x.

[1] I haven’t set out to work on a huge research report, but just a brief summary of my reasons for believing that Facebook is going to be a joke in a handful of years. I wanted to leave this online for posterity, to boost my bragging rights with friends and business partners.

[2] Point is: it’s a matter of human taste, and not leaps to better technology, fuller features, and so on. Instagram is “robbing” huge amounts of users from Facebook (at least in terms of engagement) and it’s far from more complete a platform. It’s actually a less complete platform, with lesser functions, built by 10 people in a startup. How’s that for a competitive barrier, Facebook?


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