Facebook News : Antitrust Case Thrown Out by Judge
The FTC and 46 States attempted to bring a sweeping anti-trust case against $FB.
A Primer
I am bullish on Facebook. When the stock devalued to $260s, I bought heavily. My average purchase price was $267. I have been buying Facebook steadily since August 2020 and finished purchasing in early February 2021.
I plan on buying more as long as the business trades at a reasonable Gross Profit multiple. I was buying $FB at 11x 2020’s Gross Profit. It is currently (29th June 2021) trading at 13x Trailing 12 Month Gross Profit. Assuming $FB posts another year of 20% growth in Gross Profit, you can own the business today for a relatively cheap 12x Gross Profit.
I’ll likely be adding to my position this year.
I wrote about why $FB is a good business here. I also wrote about how Facebook might crush traditional CRM and small business software here. I believe Facebook is a business that is in transition. Selling advertising alone isn’t a sustainable long term business because Facebook’s user base growth is in decline. The business isn’t accelerating user growth on its core product and ad inventory will eventually reach saturation. Revenue growth today is excellent and a chunk of it is coming from price increase for ads on the platform.
As a business owner, I did see an increase in advertising cost on Facebook during the pandemic. Facebook itself reported an increase of 30% in ad prices from pre-pandemic levels. I was very happy to pay more as the economics made sense for my business. I do think this is a red flag because increasing advertising cost = proof of declining MAUs. I am speculating here since I have not dug deep into the health of the Facebook user ecosystem. Gut check - not so great. But that doesn’t necessarily mean I am right. Twitter has a toxic reputation but is a source of amazing information for me. Like Facebook.
Antitrust Case
I hope the primer brought you up to speed about my thinking behind the large $FB investment I made in early 2021.
When I made my initial investment, market sentiment around $FB was poor. People generally found the company “icky” and there was an anti-trust case built by the FTC that targeted the acquisitions of Instagram and WhatsApp.
The case did worry me slightly because Instagram is a growing ad revenue source for Facebook. I believed that is IG was removed from Facebook, the shared user data between both platforms (which makes Facebook an incredible targeted ads machine) would cease to exist. Each platform will be less powerful.
However, I decided that paying 11x Gross Profit was low enough for this risk. The upside was i’d own shares in IG if the anti-trust case forced Facebook to spin off IG as an independent company. One can argue that this would unlock shareholder value if done well.
However, all this speculation is now laid to rest with the latest news that the Antitrust Case has been thrown out by a judge before an oral argument.
Facebook’s Biggest Challenge
Facebook is improving its ad products and attempting to improve the health of its main website. Social media platforms come and go (remember Myspace or Friendster?) and it is important to maintain relevancy with each generation of users.
I doubt $FB will last decades if it doesn’t evolve beyond being just a social media advertising company.
The biggest challenge $FB has today is to :
Grow Oculus to become the dominant VR platform. Signs are good!
Make $FB a commerce platform. Users don’t rely on Facebook just for social features, but use it for commerce. This strategy is early and $FB is quietly building the tools for it. Shops is now available on WhatsApp and have been available for sometime now on Instagram.
I am unsure if both points above will bring success to Facebook, but I am happy owning it as long as the advertising business keeps growing and providing the necessary cash flow to make 1. and 2. a reality.
Legal Disclaimer : This post is opinion and not investment advice. The author is not a licensed financial advisor and merely some guy writing stuff on the internet. The author is not liable for any investment loss the reader (you) incur from acting on information written by the author.