Facebook’s strengths rest in two very distinct areas: the user network and user data.
If you want to determine whether Facebook is healthy, you need to ignore the headlines and focus on these two aspects.
Is the user network still intact?
Is the user data still intact?
Although the headlines from Wall Street and D.C. remain decidedly negative, the average users of Facebook most likely have a very different impression of their experience and future plans.
The strength of a user network or network effects is simple. People want to go where everyone else is. Once a network effect is established, it is very hard to dislodge. Migrating to another network, although easily done in theory (it’s just one click away, right?), practically speaking, it is very difficult. It is not an understatement to suggest that Facebook has won a decisive battle in establishing itself as the dominant social networking platform. Despite the negative headlines throughout 2018, users have not begun to migrate (except perhaps to Instagram).
Daily Active and Monthly Active Users have continued to grow throughout 2018. Although the U.S. market has effectively stopped growing since almost everyone is on Facebook (who would like to be), the mass user defection reported by some media outlets doesn’t appear to have materialized. User-generated surveys are infamously unreliable (I only had one piece of pie over Thanksgiving according to all of the surveys I submitted).
The second area of strength for Facebook is its user data. Tim Cook might not agree with Facebook’s business model, but it appears that the people have chosen to share their data with Facebook in return for access to its platform and the occasional advertisement.
Facebook’s access to your user data allows Facebook to charge advertisers to target you based on what you are likely or could potentially buy in the near future.
A great contrasting example is my recent subscription to the local newspaper. I felt disconnected from the local news, specifically the political environment of my community and decided to subscribe to the local newspaper. My first impression was how highly un-targeted the ads were. Assisted-Living facilities dominated the paper, followed closely by mortuaries. Perhaps the newspaper knows something about my future that I don’t, but it was clear that these advertisements were targeting a specific demographic to which I do not belong. (Just to be sure, I checked my neighbor’s newspaper and he had the same advertisement in his paper).
Think about the best way to advertise products.
If you were designing, from scratch, the best way to advertise products, it would be an easy choice to create a user-data driven approach to advertising currently present in Facebook. Facebook knows I like going to the Utah Jazz games, and I see advertisements for their games frequently. Facebook knows that I participate in triathlons, and likewise, I see advertisements for local races frequently. Facebook’s ads are un-shockingly accurate.
Although Facebook’s current setup is almost ideal, it relies heavily on users freely sharing their data with Facebook. This setup is not set in stone and should be monitored closely to make sure that the product Facebook is offering to Facebook’s customers (the advertisers) still remains relevant. This appears to the case as ARPU in the U.S. market climbed from about $20 a year ago to $27 in the last quarter. This growth in ARPU indicates that advertisers are still increasing their spend on Facebook’s platform and still finding value with those dollars.
Admittedly, all of these items could be trailing indicators, a fancy way to say that the future could be different from the past and the present. However, I would imagine, given the instant feedback from the platform, that advertisers would begin to rapidly shift money away from Facebook if its effectiveness began to decline, especially with the backdrop of the negative headlines surrounding Facebook.
The financials of Facebook are similar to a goose laying a golden egg each day. The only real question for investors is how long the goose is going to continue producing golden eggs. The combined user network and user data are the goose. If these two items remain intact, the goose will continue to lay golden eggs.
Therefore the key analysis that should be done and continually be examined is how strong the user network remains and how much access Facebook has to its user data. Focus on these two points and the financials will take care of themselves.
I believe that both these items are strong and will remain intact for the foreseeable future. I own and have bought more shares in Facebook in recent weeks, for myself and my clients in the accounts managed by The Sova Group, LLC.
Matt Brice can be reached at email@example.com.