Rooting for Peak Facebook

Posted on August 14, 2019September 9, 2019 by mikejsiegel

Peak predictions are tempting. Peak Oil has been an on-going prediction since at least the 60s, yet here we are in 2019 and have yet to reach peak oil.

In tech, peak Apple has been everyone’s favorite (incorrect) prediction.

Facebook is the newest peak-predicting victim.

MG Siegler has been a fan of predicting Facebook’s demise. The first such prediction he made in 2015, but he’s made others, going as far as penning a post called “Peak Facebook” a year ago.

Here is his latest take, writing about “Instagram by Facebook” –

The first thing that jumps to mind: Facebook is dead. Long live Facebook!
This is pretty clearly a way to cheat death (eventually). Or, at the very least, to hedge against it. It’s a lot harder to have a narrative around the “decline of Facebook” when Instagram by Facebook and WhatsApp by Facebook are thriving. (Not to mention that it would seem to be an attempt to solidify the “they can’t be broken apart” narrative…)

But there is a very real downside risk here. As the article notes, many people don’t know that Instagram is owned by Facebook. If and when they now know, does that change their usage at all? Even I — obviously very aware who Instagram is owned by — find myself questioning if this will or should change my usage. I mean, it’s just a name change! But it’s also a clear signal of the way forward..

First, let’s look at the facts. Facebook added 25 million DAUs last quarter for a total of 1.587 billion daily users. That’s insane and obviously objectively not peak Facebook. The fine print shows that these numbers do not include WhatsApp or Instagram, this is the big blue app.

Since MG’s first peak prediction in 2015, Facebook has added a whopping 500 million DAUs! 50% growth from their 1 billion at the time in 2015. Amazing, and shows how foolish MG’s prediction was at the time.

MG is missing another detail with his latest critique. Facebook is not outright saying why they are changing Instagram and WhatsApp to “Instagram by Facebook” and “WhatsApp by Facebook”. The detractors like to accuse Zuckerberg of being vain. There is a rumor going around he’s “annoyed” that he isn’t getting credit for their success.

This seems wildly out of character for how Zuckerberg has acted in the public to date. If anything, Zuckerberg would love to be more under the radar than the intense scrutiny his company receives.

What is more likely is that this change is due to pressure from regulators, most likely European regulators. The regulators feel Facebook is tricking people by not being more upfront about owning these apps. Facebook is getting ahead of this critique by becoming more transparent about their ownership.

And this sums up Facebook’s current can’t-win situation. Damned if they do, damned if they don’t.

Facebook Founders Fly The Coop

Posted on September 30, 2018 by mikejsiegel

Instagram, WhatsApp, and Oculus. These are the three prize acquisitions of Facebook and, as of last week, these three units no longer have their founders. For years Facebook has been praised for acquiring companies and, for the most part, allowing these companies to stay independent. As time went on, that independence eroded and the founders eventually left. Critics of Facebook are jumping all over this alleged change. Did Zuckerberg mismanage this situation? Will founders be less likely to sell their companies to Facebook going forward? Is Facebook a terrible place to work?

Gruber and Acton’s Take

Let’s start with Gruber’s take (of DaringFireball)

Parmy Olson, writing for Forbes:

For his part, Acton had proposed monetizing WhatsApp through a metered-user model, charging, say, a tenth of a penny after a certain large number of free messages were used up. “You build it once, it runs everywhere in every country,” Acton says. “You don’t need a sophisticated sales force. It’s a very simple business.”

Acton’s plan was shot down by Sandberg. “Her words were ‘It won’t scale.’”

“I called her out one time,” says Acton, who sensed there might be greed at play. “I was like, ‘No, you don’t mean that it won’t scale. You mean it won’t make as much money as… ,’ and she kind of hemmed and hawed a little. And we moved on.” […]

When Acton reached Zuckerberg’s office, a Facebook lawyer was present. Acton made clear that the disagreement — Facebook wanted to make money through ads, and he wanted to make it from high-volume users — meant he could get his full allocation of stock. Facebook’s legal team disagreed, saying that WhatsApp had only been exploring monetization initiatives, not “implementing” them. Zuckerberg, for his part, had a simple message: “He was like, This is probably the last time you’ll ever talk to me.”

Gruber’s response to this quote – “Sounds like a delightful place to work.”

The WhatsApp founders are presenting themselves as benevolent product people who want to empower people to communicate. By contrast, Acton is presenting Facebook as greedy, immoral capitalists that want to make a buck at all costs. As usual, the truth is somewhere in the middle.

Facebook acquired WhatsApp four years ago, on February 2014 for $19 billion, yes billion with a “B”. Over the last four years, Zuckerberg and the rest of Facebook have let WhatsApp run independently. So far WhatsApp has made Facebook a whopping $0. It appears clear to me that Zuckerberg’s patience was up and he was pushing Acton and the rest of WhatsApp to start monetizing. For the leader of a public company, this is the right thing to do. Four years of no monetization and focusing on the user/product is very fair, now go make some damn money.

Was Acton against monetization? No, but he appears to be against Facebook’s preferred approach of monetization – Ads. His quote in the interview is great for eyeballs but did he actually believe Facebook would want to use a metered-user model? How long would it take for this metered-user model to make back the $19billion Facebook spent?

Facebook doesn’t make money this way. Facebook wants their products available to everyone, and for free, supported by ad revenue. Note to all founders – if you sell your product to Facebook (or Google) it will be supported by ads someday.

The second part of Acton’s quote, “You don’t need a sophisticated sales force. It’s a very simple business.”, also shows a naive understanding of Facebook’s business. Facebook’s long-term approach is a self-serve ad model. Facebook is implementing a “very simple business” monetization approach to WhatsApp, and one that they know very well.

Ads are Bad

What exactly is Acton’s beef with serving ads in WhatsApp Stories? Is this really as “evil” and “creepy” as Acton and many journalists believe? Are serving the most relevant ads to users to support a tool many people benefit from every day more “evil” than charging the same people? This is the narrative I have trouble understanding despite the amount of ink spilled about it.

The main fear is that Facebook’s drive for targetted ads forces it to act as a surveillance organization, not that dissimilar than the NSA. Some believe this information can be used against you. Does Facebook have enough personal/private information to cause harm to you? That’s in the eye of the beholder.

If the root of the fear against ads is not in the ads themselves but with the surveillance that comes with targeting ads, is there a way to improve this fear? How much less money would Facebook make with no targeting at all? 10x less? Could Facebook modify targeted ads to be opt-in, including what information is available for targeting? It’ll be interesting to see how Facebook addresses this issue in the long-term.

Sounds like a delightful place to work.

Gruber’s accusation that Facebook is a terrible place to work is laughable. Yes, Zuckerberg appears to have a ruthless side to him. I’d imagine all CEOs running a company of that size has this side to them. That being said, by all accounts, Facebook appears to be an excellent place to work.

Facebook is #1 in Glassdoor’s “Best Places to work” category and Zuckerberg consistently ranks high in the “Best CEOs at large companies”. He currently ranks 18.

But, but, the Instagram and WhatsApp founders quit! This must surely mean there is a problem!

Not quite. Founders leaving a company after being acquired is inevitable. The fact that the Instagram founders stayed for six years and the WhatsApp founders stayed for four is astounding. Most founders have zero desire to work for a large company, which is why they’re founders. Most companies work quickly to monetize and make their mark on their new baby, but Zuckerberg allowed these companies to run independent much longer than most, which kept their founders around longer than expected.

What this means for the future of Facebook Acquisitions

If there ever was a myth that you could sell your company to Facebook, get rich and never have to monetize, that myth is now exposed. But, I don’t believe this was ever the case. Every founder knows every deal has strings attached.

As Ben Thompson put it

Controlling one’s own destiny, though, takes more than product or popularity. It takes money, which is to say it takes building a company, working business model and all. That is why I mark April 9, 2012, as the day yesterday became inevitable. Letting Facebook build the business may have made Systrom and Krieger rich and freed them to focus on product, but it made Zuckerberg the true CEO, and always, inevitably, CEOs call the shots.

Perhaps Systrom, Krieger and Acton were all too naive to understand this but it’s unlikely. Their treatment and resentment of Facebook may cause founders in the future to take a closer eye at a Facebook offer but unlikely to deter them. Facebook’s pockets are deeper than ever, and these deeper pockets can make up for any goodwill lost here. The impact on these departures is hard to predict and even harder to measure but keep your eye out for more high-profile Facebook acquisitions, they’re not done yet.

Growing Facebook, Inc.

Posted on July 31, 2018 by mikejsiegel

It’s been a wild ride for Facebook’s stock in 2018. It was punished by “Cambridge Analytica” in April but had a big ramp up from May-July resulting in an all-time high market cap of ~$630 billion dollars.

But that changed when Facebook released its earnings last week. The stock dropped over 20% and the current market cap is closer to $500 billion. Wall Street is spooked about Facebook’s guidance for slowing growth.

Our total revenue growth rates will continue to decelerate in the second half of 2018, and we expect our revenue growth rates to decline by high-single digit percentages from prior quarters sequentially in both Q3 and Q4.

– Facebook CFO Dave Wehner

Is the market acting rationally? Was the earnings report “abysmal” like many hot takes have labeled it?

Financial Fundamentals

In Q1, FB’s revenue grew 49% yoy. In Q2, FB’s revenue grew 42% yoy. This new guidance puts FB’s Q3 growth greater than 32% and Q4 growth greater than 22%. Although this guidance is lower this is incredible growth for a company of Facebook’s size. Apple, Google, and the all mighty Amazon have all averaged growth under 30% yoy the last decade. Even with Facebook’s revised guidance, it is ahead of the pace of its peers. With its P/E at 23, this gives FB a PE/Growth (PEG) of well over 1. According to value investor Peter Lynch, Facebook is cheap from a fundamental perspective.

It seems difficult to label this earnings call as abysmal. The fundamentals are strong with few attacks on its current business model. But does this make Facebook a value stock instead of a growth stock?

#DeleteFacebook

The height of #DeleteFacebook was in April and any ramifications were reported in the earnings last week. US & Canada were flat with both DAUs and MAUs, which means few followed through with deleting their account. European users saw a decrease in DAUs which Facebook is attributing to GDPR rollout, not towards #deleteFacebook.

The good news from the earnings report is that there is no mass user exodus. All “Peak Facebook” predictions have fallen flat. That being said, user growth of Facebook.com may move closer to internet growth in general. But should Facebook’s growth potential be evaluated based on Facebook.com’s user growth? Or should Wall Street start paying attention to the new number rolled out these earnings –

For the first time today, we’re also releasing how many people use at least one of our apps, Facebook, WhatsApp, Instagram or Messenger, and that’s 2.5 billion people each month.

-Mark Zuckerberg

WhatsApp, Instagram, and Messenger can all continue to grow for years to come. Since Facebook provides a way for advertisers to target users on any of their apps, it doesn’t quite matter which of these apps the eyeballs are on. Therefore, revenue growth is no longer as tied to Facebook.com’s user growth as it has been in the past.

Areas of Growth Opportunity

Stories

The biggest place Facebook has work to do is in monetizing Stories. After paying $22 billion dollars for WhatsApp in 2014, Facebook finally has an opportunity to make some of that dough back. WhatsApp has 450mm DAUs on WhatsApp Status (their stories format). Add another 400mm for Instagram stories and 150mm on Facebook stories and you have a lot of eyeballs to monetize.

Like the mobile monetization before it, I expect Facebook to easily capture value with Stories. In Facebook’s early days as a public company, many doubted its ability to advertise effectively on mobile. Today, it accounts for 91% of Facebook’s advertising revenue

Mobile ad revenue was $11.9 billion, a 50% increase year-over-year, making up approximately 91% of total ad revenue.

Similar doubts exist about Facebook’s ability to monetize Stories. These doubts will go unfounded as time goes on. The uncertainty around monetizing mobile ads were more founded than Stories since no other mobile app was monetizing ads at scale when Facebook started that journey. But with Stories, Facebook (and Wall Street) has Snap to use as a model. Snap is pulling in ~$1.20 per quarter per user from Stories monetization (and growing 35% yoy). With over 1 billion DAU Stories users, Facebook can easily make another $1 billion per quarter from these ads (and I expect much more as time goes on).

Marketplace, Workplace, and Occulus

Like Google before it, Facebook continues to attempt to diversify its revenue streams but so far all attempts are dwarfed by the mega success of their advertising products.

“Payments and other fees” brought in $193mm, which is 1.5% of total revenue. This means that Marketplace, Workplace, and Occulus are not producing significant revenue. Although this is an area of opportunity this is also an area to keep expenses down. Facebook remains more focused than Google and Amazon, but can Facebook make the tough decisions? Can/will Facebook shut down a major effort if it underperforms?

Based on its low PEG, you can make an argument that Facebook is a value stock. But its growth days aren’t over as last quarter has shown. When you consider the revenue growth and user growth potential of products under the Facebook umbrella, it becomes clear that Facebook is a growth stock with fundamentals that appeal to a value stock investor.

FB will reach a new all-time high before 2018 is over. The $1 trillion market cap is still less than five years away. Facebook’s growth isn’t over yet.

Disclaimer – I own $FB and am biased AF

Facebook is F*cked, Long Live Facebook

Posted on June 28, 2018 by mikejsiegel

In March, in the thick of the Cambridge Analytica and #DeleteFacebook “movement”, I wrote a piece defending Facebook.

It’s now June and time to reflect. Zuckerberg has been dragged in front of Congress and the European Parliament. The Cambridge Analytica headlines have slowed. #DeleteFacebook is no longer trending. Facebook released earnings results which showed user growth, not users leaving Facebook. Furthermore, Facebook’s stock has reached an all-time high, over $200 a share and a near $600B market cap.

Facebook Nevers

MG Siegler remains a top 5 tech writer in my book but I disagree with his Facebook analysis. After seeing #DeleteFacebook was a complete joke, MG has turned his rationale for Facebook’s inevitable decline…”Facebook Nevers“.

The fall of Facebook was never going to be people quitting the service en masse — it’s too interwoven into the fabric of the way many of us use the web these days — it was always going to be the people who never really use the service in the first place. Kids.

MG compared Facebook to Cable. It’s not that people will quit en masse but youngsters won’t sign up. He acknowledged that probably wasn’t the case –

But again, Facebook is so integrated into so many lives that in many cases you’re basically forced to sign up. Even the kids in many cases. Just as they must sign up for an email account. It’s a rite of passage, in a way. Your entrée onto the internet. So perhaps “never” is a bit harsh of a word here.

Anecdotally, what MG says in the last quote is what I’ve experienced. All of my younger cousins are on Facebook but don’t post to it much (it’s unclear how often they lurk). MG’s analogy to email is spot on here but he missed the larger arch. Young people will sign up for both email and Facebook early but won’t use either…until they become adults. They’ll use email when they go to college and much more when they enter the workplace.

Facebook is awful when you’re finding yourself as a kid. But it’s awesome when you’re stuck at home raising two young children. Sharing your children grow with people around the world is amazing for parents. Facebook will have less use in the 13-25 demo but once people enter parenthood, their behavior will change in many ways, including how they use social media.

$100B Instagram

According to “Bloomberg Intelligence”, whatever the hell that is, Instagram is now worth $100B. That number may as well be right but something is worth how much someone is willing to pay for it, not based on what data or some analyst says. That being said, Instagram is killing it.

In March, I said –

Few will #DeleteFacebook and those who do will come back or increase their Instagram use.

This appears to have come to fruition. Instagram now has over 1 billion users with 400 million users using Instagram Stories daily. That’s a shitload of engagement. For some reason Facebook is not releasing time spent on Instagram so attempts to compare it to Snap is apples to oranges.

Who knows if Instagram is worth $100B but it’s safe to say it’s not being factored into Facebook’s valuation reasonably. With Facebook’s PE hovering around 25, the market isn’t expecting much growth from a product now responsible for over 15% of FB’s revenue (and growing rapidly).

Facebook to A Trillion in Five Years

Now that the media cycle has passed and the Facebook bears have went into hibernation, we can talk about where Facebook is going. Five years ago Facebook’s market cap was ~ $60B. Many thought that was absurd but here we are, five years later and $FB is worth 10x more.

Facebook is ~$400B (1.7x growth) away from the elusive $1 trillion market cap. With revenue growth at 47% in 2017 and PE at a reasonable 28, it’s hard to see this locomotive slowing down anytime soon. To get to $1 trillion dollars, FB needs to average a paltry (for Facebook) 12% market cap growth a year.

Facebook growth with 12% yoy market cap growth per year

How does it get there? Can Facebook continue to grow its user base past 2 billion? Although there are another 6 billion people to go in the world, Facebook can reach $1 trillion through ARPU Growth.

Over the past seven years Facebook has averaged 26% growth in revenue per user. Continuing this trend alone will push Facebook past the $1 trillion mark with ease. User growth, monetization of WhatsApp, Oculus revenue etc is icing on the cake.

Facebook’s demise was media hype. Instagram will continue to grow its user base and monetization. Facebook proper will continue to be Facebook, serving 2 billion people a day content and ads. ARPU will continue to increase. In 5 years, $FB will be worth $345/share at a $1 trillion market cap.

There are dozens of reasons why these predictions may not happen, but I’m putting my money on Zuckerberg and Facebook. Easy money!

Disclaimer – I own $FB and am biased AF

The Positive Beat

Posted on April 30, 2018 by mikejsiegel

Beat reporting, also known as specialized reporting, is a genre of journalism that can be described as the craft of in-depth reporting on a particular issue, sector, organization or institution over time.

This month I’m taking a break from writing about tech to get meta. I want to write about writing.

My favorite content online is by those who have a beat. Writers with specialized knowledge on a subject. Writers with an expertise, not those summarizing a press release.

Throughout the years I’ve grown fond of M.G Siegler’s and John Gruber’s take on Apple. And Josh Constine’s take on Facebook.

There are two other commonalities about these writers that separate them from the pack. They have a distinct voice. I enjoy the way their writing sounds when I read it in my head. But perhaps more importantly, they all took a positive beat. M.G. and Gruber are known as being Apple Fanboys. Josh was able to see Facebook’s potential when many doubted them.

But, surprisingly, I find taking a positive beat rare. Even more of a bummer, M.G., Gruber and Josh are all spilling more ink on critical, negative beats. M.G. loves Amazon but hates Facebook and has grown more critical of Apple. Gruber is generally pro-Apple but detests Trump, Facebook, Guns and Google. Josh prefers to criticize Snap, and like the rest of the blogosphere, crucified Facebook over Cambridge Analytica.

After a newsletter where M.G. was bearish on the HomePod and MoviePass I wrote to him:

A lot of negativity in this one! HomePod is a flop, MoviePass won’t work out, etc.

Not that you always have to be a cheerleader but I think writing on things you are bullish about have always been your sweet spots. Back in the day you nailed the positives about Apple when the majority of your peers were pressed to write hit pieces.

I know you know this, but I think time will tell your take on the HomePod is wrong. Apple is playing the same strategy they’ve always played with devices. Go high-end, have good margins to start, don’t worry about market share. Marketshare comes with a superior product. I hope you write this down as claim chowder for yourself, if Apple shows a Watch-esque position with the voice-commanded speaker market, they pulled it off.

He replied:

I try not to think of things as negative vs. positive, I care far more about being proven right in the end! And yes, we’ll see how HomePod does — especially after the first price cut and launch of SiriKit at WWDC!

+1. Being right is more important than being positive. I’d never want to take an incorrect positive stance.

Hating clouds your judgement. People are at their worse (and illogical) when they’re offended and outraged.

M.G. made his mark by making the Apple bears look like fools. While most were writing about “Peak Apple”, M.G. saved their claims as claim chowder. When their foolish predictions were proven incorrect, he call em out. Yet, here is M.G., three years ago, incorrectly claiming (by nearly 500mm users) that we reached Peak Facebook.

Gruber, Siegler and Constine all took bearish stances on Facebook the last couple of months. I decided to go against the grain and defend them. As Facebook’s latest earnings report shows, the media once again overreacted.

And there you have it, my negative take on negative takes. M.G. is right, stick to being correct first and foremost, but there is too much positive going on in this world to focus on the negative. Negative bias appears stronger than Positive bias. Those who hate tend to get it wrong.

As I write going forward, I want to concentrate on the following. Write about what I know. If I don’t have anything good to say, I won’t say it all. I’ll find something else to cover. Put your money where your mouth is. If I write positively about a company, I should own their stock. And finally, write using a voice. This last part, the most important, is also the toughest.

In Defense of Facebook

Posted on March 24, 2018 by mikejsiegel

The Criticism

Facebook’s in the hot seat. Facebook is catching heat for the way a third party used Facebook data. Cambridge Analytica used data from a Facebook connected app in 2015. This app allowed a developer to harvest data from the friends of those who signed up. This gave them information about 50 million people. Names, occupations, check-ins, posts and more. The public sentiment is that it’s wrong for a company to allow anyone to hand over your data to a third party. Your friend should not be able to do so. Note: Facebook stopped allowing third parties to grab friend’s data in 2015.

It’s believed Cambridge Analytica used this data to help the Trump Campaign. Cambridge Analytica used the profile data with other data to create psychological profiles. They believed these profiles allowed them to better target political ads.

Facebook Is Not Alone

Context is key. Although it doesn’t justify being loose with data, Facebook is not alone. Apple via iOS’s “Allow Access to Contacts”. Google via Android access to Contacts and Google+. LinkedIn. All have allowed developers access to their friends’/connections’ information.

There are companies who have created large databases of our information up for a price. FullContact is a leader in this space. Use their API here to find out what they know about you.

Theories on Public Reaction

Despite the lack of evidence that this targeting was effective, the public is furious. Despite other companies allowing people to share their friends information, Facebook appears to be singled out. I’m trying to put my finger on why now and have some working theories.

Google vs Facebook

Google Search helps you find things. It’s a utility. Facebook is a community of people. Communities like Facebook elicit emotions and sometimes these emotions are negative. When you read hate spewed by a distant friend, you associate that emotion with Facebook. Facebook can be a magnifying glass on your community, and it allows you to see the warts.

Facebook is also a mirror. Facebook can be addictive. It makes it easy to see you may care about what others think about you more than you care to admit. Instead of focusing the energy on improving, many choose to blame Facebook.

The Trump Connection

The Trump association to the public outcry is hard to deny. Obama’s campaign’s use of friend’s data has not caused an uproar. Obama’s campaign did not violate Facebook’s Terms of Service. But the app did use data that the “friend” didn’t approve of. Like many things connected to Trump, his association exasperates the public reaction.

Myth vs Reality

Myth – Facebook sells your and your friends’ data

Reality – Facebook does not sell data. Facebook sells access to advertise. Facebook no longer allows third-parties to have access to your friends’ data

Myth – You are the product

Reality – Facebook must serve their users. Without the 2 billion users, there is no one to advertise to. Zuckerberg has proven he is in it for the long haul. Zuckerberg will continue the balancing act of pleasing the 2 billion users. Not to mention the media, governments, businesses and advertisers.

Google, of course, poses similar threats to the journalism ecosystem through its own digital advertising industry. But Googlers can also make a strong case that Google makes valuable contributions to the information climate. I learn useful, real information via Google every day. And while web search is far from a perfect technology, Google really does usually surface accurate, reliable information on the topics you search for. Facebook’s imperative to maximize engagement, by contrast, lands it in an endless cycle of sensationalism and nonsense.

– Matthew Yglesias, Vox

Myth – Facebook has no value to the spread of information. Facebook focuses on maximizing engagement.

Fact – Facebook provides a platform for discourse. Those posting “Fake News” may learn from the hive.

Facebook may have focused on maximizing engagement in the past but no longer. Zuckerberg has said the new goal is “to make sure time spent on Facebook is time well spent.” Zuckerberg understands users will leave if he maximizes engagement in the short-term

Facebook Regulation

Facebook is a public company in the United States and used all over the world. Facebook is under SEC, FTC, EU and many more regulations. Will new regulations form that will affect Facebook? Yes. This has always been the case. The fear the market is having now about regulation seems irrational. Facebook makes money by allowing targeted advertising. Facebook does not make money by selling (or giving away) data.

Regulation as a response from this news may make Facebook stronger. As we’ve seen with Cable regulation, regulation can create a cycle that makes it more difficult for startups to challenge an incumbent.

What type of regulation makes sense to protect user data? Governments will most likely demand tighter control of user data. This may mean no exporting of data. Less data portability makes it harder for an incumbent to bootstrap their service using Facebook data.

Incumbents will have to spend money and time to meet any new regulations around user data. Facebook has the money and resources to do this easily.

Facebook Valuation

Facebook’s PE (price to earnings) is 25. In comparison, Google’s is 31, Microsoft’s is 26 and Amazon’s is 352. Compare that to their growth rate the past ten years. Facebook’s revenue growth rate per year has been 80%, Google’s 24%, Microsoft’s 7% and Amazon’s 29%. Facebook is growing quicker than its peers yet the market is valuing its potential lower. The S&P 500 has a PE of 25. Is Facebook’s growth going to be the same as the S&P 500 like currently valued? There is sentiment to back up this valuation, and sentiment alone. Sentiment and reality aren’t always connected.

Facebook’s core business has continued to grow like a weed. Instagram continues to grow and make revenue. WhatsApp and Oculus provide little to no revenue but have great potential. With a PE at 25, it’s as if the market values these assets at 0.

Bottom Line

Facebook discontinued the level of access that caused this leak in 2015. There is no evidence this targeting affected the election. The public outcry is not without merit but an overreaction. Few will #DeleteFacebook and those who do will come back or increase their Instagram use.

Facebook will continue to be a lightning rod for criticism. Facebook will continue to improve their PR game. People will continue to use Facebook. Facebook will continue to grow, make more money and be more of an influence on society. Zuckerberg will continue the balancing act.

Note – I own Facebook shares and I’m bullish…if you can’t tell 🙂

Keep Calm and Snap On

Posted on August 18, 2017 by mikejsiegel

Snap has released their Q2 results. If you trust the pundits, it was “another failure on a long, downward path for the social media company.” Impatient journalists and those on Wall Street seeking the quick buck aren’t happy. The buy-and-hold types have a lot to be happy about.

The Good News

Daily Active Users grew 21% year-over-year from 143 million in Q2 2016 to 173 million in Q2 2017. An increase of 30.5 million users. For the quarter, DAUs was up 4.2%, adding 7.3 million users.
Average Revenue Per User grew 109% year-over year from $0.50 to $1.05. ARPU increased 16% over Q1 2017 when ARPU was $0.90.
Total revenue grew 153% year-over-year and up 21% from $149.6 million in Q1 revenue to $181.6 million.

Snap is growing in every way an investor would like (although not at the pace the greedy would like to see). The real story is the product evolution. Snap released 16 versions of Snapchat in Q2 compared to Facebook’s 6 releases. Not only is Snap moving fast with quick releases but some of the releases had massive features. Snap Map, a way to see where your friends are and what is going on at specific locations, was released in Q2 and well received. There has been much written about Snap being copied but Snap moves too fast. You can’t copy their soul.

Misunderstood – $FB vs $SNAP 166 Days Post-IPO

Snap isn’t the only tech company that was underwater 166 days after their IPO (the day of this writing). $FB IPO’d at $38 and closed down 42% from the IPO price at $22. $SNAP IPO’d at $17 and closed down 23% from the IPO price at $13. The $SNAP doomsayers emphasize the risk of losing top talent when the stock temporarily underperforms. $FB was able to weather a tougher storm than $SNAP is going through. If an employee is swayed to leave by short-term stock swings they are not buying into Snap’s potential like they should. They don’t get it, just like a lot of those on the Street.

After Facebook’s first two earnings reports the Street continued to be concerned about mobile monetization. Facebook had just started their mobile monetization efforts and the rewards were inevitable. This is similar with Snap. Some want revenue to grow quicker than it is but Snap just started to monetize. This will take time.

Analysts continue to speculate on User Growth, Revenue and Profit/Loss despite lack of guidance from Snap. Snap will “miss” these numbers and the market will respond (in the short-term). This is because Wall Street doesn’t understand Snap’s User Growth will not be like Facebook’s. Snap is for the savvy, smartphone owning, high speed bandwidth users. Facebook, with web apps, mobile apps on every platform, “Facebook Lite” etc, is for everyone. Snap is unlikely to have the 1.35 billion DAUS that FB has anytime in the next decade. Snap won’t dominate the masses but it will dominate the critical 18-35 demographic for sometime.

Bottom Line

Facebook is where the puck is. Snap is where the puck is going. User Growth for Snap will continue to feel the headwinds until the rest of the world catches up with high speed bandwidth. Snap would have to compromise the product too much to appeal to the emerging markets and it’s not worth their time in the long-run. Snap’s play is to continue to evolve the most modern social media app for the young and savvy. Continue to take advantage of the latest and greatest in tech and monetize those savvy users with deep pockets.

Snap’s market cap is currently ~$16 billion. Napkin math says Snap would need to get to 200mm DAUs at $20 annual ARPU for yearly revenue of $4billion and profit margin of 25% to justify that valuation (that would be a PE of 16). Despite being 5X away from that ARPU number, those seem like a layup for Snap. Someday we’ll look back at the market’s response to these early earnings reports and laugh, just like we do with Facebook now.

Young Users

Posted on March 31, 2016 by mikejsiegel

Old habits die hard. As you get older your mental models of the world become more rigid. You know what you know but ya start becoming closed off to trying new things.

People making products, especially products with a shitload of users, run into this all the time. As processors and cellular networks improve, new features are possible but people are stubborn, they like the way they do X and they’re not trying to change it.

Facebook, with over a billion users, has a tough task on hand. They don’t cater to the lowest common denominator but they don’t cater to their advanced, or power users either. This means Facebook doesn’t release the most advanced product they can, Facebook makes concessions so they can release a product that will be widely used.

Snapchat, on the other hand, is doing an excellent job of capitalizing on bandwidth and smartphone improvements. “Stories” – a mixture of photos and videos that users create using the editing tools Snapchat provide are a perfect example of this. When Facebook came out, sharing videos was a pain in the ass, it was slow and cameras weren’t readily available. People form a mental model around what Facebook is as they use it and when things change it becomes difficult for companies to break out of the box their user base sees them in.

Facebook has done a great job pushing against that tide and have made huge inroads with videos, some say they’re even surpassing youtube, but taking a video of yourself and uploading it to Facebook is not the ubiquitous behavior you see in Snapchat.

Snapchat has a much younger and more open minded user base and this allows them to be more aggressive with their product. When Snapchat Chat 2.0 was released on 3/29 I was curious if they were going to push the envelope in the chat game. Sure enough, they delivered.

The chat game is crowded, as I pontified on before. It’s hard to make inroads but one of the ways to get started is to piggyback on your social network’s user base. Unlike Facebook and Instagram that have public ways of giving props, Snapchat lacks this which encourages users to send a chat if they like a Story or have something to say. It’s funny because, like the name implies, Snapchat started off as an ephemeral chatting app, evolved into a Social Network and is now getting back to its roots and beefing up its chatting abilities.

It’s one thing to release cool features it’s another to have them be used. At 33, most of my friends will be reluctant to embracing the new features. The majority in my age group insist on using feature-poor iMessage or SMS. Luckily I’m on the older side of Snapchat’s user base. Snapchat Chat 2.0 will be immediately embraced by their users. For whatever reason I find the stickers lame (too old?) but I look forward to seeing my (younger) friends live stream, create small gif-like videos, annotate em with Snapchat’s editing tools, audio notes and more.

Yentas, the Messaging Gold Rush

Posted on January 19, 2016 by mikejsiegel

We’re all a bunch of yentas and inventors from Samuel Morse to Alexander Graham Bell to Brian Acton (WhatsApp) have made a ton of money making it easier for us to chit chat. Communication is a time-tested gold mine that’s changing with the rise of new paradigms (like smartphones). With so much at stake, we’re experiencing an intense battle between all sorts of players vying to solve our messaging needs.

To name a small sampling ya got iMessage, WhatsApp, Facebook Messenger, GroupMe, Line, Viber, Kik, Tango, Skype, Slack, Google Hangouts (Gchat), Tencent QQ, Snapchat etc etc etc. They all have different twists to them but the general use case is the same: help people directly communicate.

These players differentiate in a few key ways:

Communication styles is the first way these messenger services start to differentiate. People like to communicate differently depending on where they’re at and what they want to say. You have short text (SMS-style), longer texts, pictures, videos, gifs, voice, ephemeral messaging, and who knows what will be next…VR videos?

Cross-platform is a big differentiator in the messaging wars. Many of the newcomers are smartphone only (iOS and Android generally). Skype crosses a number of platforms (Windows, OS X, Windows Phone, iOS, Android, Blackberry OS). This cross-platform support ensures the vast majority of computer and smartphone customers can use a messaging service conveniently on the device they have on them.

Interoperability is the next decision all of these messaging services wrestle with. The majority of the popular ones are single-protocol –i.e. ya gotta be on Google Hangouts to talk to others on Google Hangouts. When you go multiprotocol, you allow your users to talk to people outside of your messaging service.

Deciding how to approach each of these areas of differentiation can be a challenge, and implementing too much can slow down your ability to do anything cool. Supporting multiple communication styles adds complexity to both the code base and the UI. More communication styles limits what platforms you’ll be able to support with parity. A cross-platform strategy adds complexity to the development process — instead of building a feature once you build it per platform. Supporting multiple platforms can affect your ability to support these features and can result in a “lowest common denominator” type effect if you want a consistent user experience. Same thing with interoperability, you ultimately hinder your ability to support numerous protocols well (e.g. if you want to use SMS, you’re limited to 160 characters).

In the messaging game, getting better distribution (cross-platform, interoperability) makes it harder to do cool stuff. If you want that premium, cutting edge experience, you go for the 80/20 rule when it comes to cross-platform and not worry about interoperability.

Of all these players, I’m digging Facebook’s approach. They have two massive horses in the race with WhatsApp and Facebook Messenger, which allows them to try out different strategies that will capture different segments of the market. WhatsApp is all-in on the cross-platform strategy and removing the $1/year fee removes the remaining friction there to get on WhatsApp. Sure, the experience won’t be great and definitely won’t be consistent for all users, but WhatsApp will continue to capture the low-end market where people want a cheap way to chat.

Facebook Messenger is going for the premium experience and taking the platform route. It’s single-protocol, it’s got a web presence and is on the major mobile platforms, but it’s focusing on the cool things. More importantly, Facebook is empowering other devs to do cool things within Messenger.

In the messaging space, being the best of breed might not mean squat. The network effect is too important, you go where your friends are. I love Facebook Messenger but I gotta admit, I’m a iMessage, Google Hangouts, email, SMS (non-iOS users) Facebook Messenger, Skype, WhatsApp kind of guy, in that order. I may like Facebook’s strategy the best but I go where my friends are.

Has Facebook’s Social Network Peaked?

Posted on April 1, 2015 by mikejsiegel

The big question mark in my mind is if Facebook can monetize the new Facebook Federation fast enough to counter the eventual decline of Facebook, the social network.

To be clear, as the network approaches 1.5 billion active users, it’s not going away any time soon. But I’d bet on a slow decline of the main product starting sooner rather than later. (Who knows if they’ll ever admit this though since Messenger users are technically Facebook users and many people I know have Facebook open on their desktops just to use Messenger.)

The Facebook Federation

MG did a good job avoiding the tiresome claim that Facebook the company would die, but did decide to vaguely predict the peak of Facebook, the social network.

Is Facebook diversifying and splitting up the Social Network a bit? Yes. Has Facebook, the Social Network, peaked? Not based on anything objective that I can think of – total users, daily active users and money per user.

Screen Shot 2015-04-01 at 1.33.45 PM — Facebook Daily Active Users

Screen Shot 2015-04-01 at 1.34.22 PM — Facebook Average Revenue per User

The numbers tell a much different story than MG’s gut feeling. Daily Average Users continues to grow, dollars per user also continues to grow and at an impressive rate. Although there are 1.5 billion people on the network already there are nearly 3 billion people with access to internet. There are also 4.2 billion people without access to the internet, which Internet.org is attempting to address. There are plenty of people that Facebook can go after to grow the network. Law of Large numbers be damned.

Perhaps MG has experienced Facebook fatigue, his usage of the Social Network may have peaked but the numbers do not indicate it’s peaked for the rest of the world.

Based on the post, it appears MG feels Facebook’s diversification is what signals to him the Social Network has peaked. Google and Amazon have also similarly diversified but I believe their cash cows – Google.com and Amazon.com are far from their peak.

The Social Network will evolve but I believe it’s far from it’s peak.

Disclaimer – I own $FB, $GOOG and $AMZN