While the user numbers have leveled off in North America, where Facebook already counts 72.5% of the population in its user base, the company continues to grow its user base in the rest of the world, with an added impetus coming from the scaling up of Instagram, Facebook’s video arm. It was the news story on Cambridge Analytica’s misuse of Facebook user data, in mid-March of 2018, that started the ball rolling and in the days since, not only have more unpleasant details emerged about Facebook’s culpability, but the rest of the world seems to have decided to unfriend Facebook. To undersand how Facebook became the company that it is today, let’s start with its most impressive numbers, which are related to its user base. It has managed to to convert its user base into revenues and more critically, operating profits. The first is a corporate governance effect, since changing management becomes much more difficult, and that can affect how you value and view badly managed firms. This will lower the value that you estimate for the operating assets and equity in the firm. The second is a unit problem, since a voting right share and a non-voting right share represent different equity claims and cannot be treated as having the same value.
If that sounded insulting, it was not meant to be, since having a revenue path and operating margins that mimicked the most successful tech companies in the decade prior is quite a feat. In my last post, I noted that the FANG boutiques near me s have been in the spotlight, as tech has taken a beating in the market, but it is Facebook that is at the center of the storm. If you are a value investor, it would easy to dismiss Facebook as another user-chasing tech company and deliver a cutting remark that you cannot pay dividends with users, but Facebook is an exception. I under estimated how much Google and Facebook would both expand the market and dominate it, but I have no regrets about selling too early. What makes Facebook’s rise even more impressive is that it has been able to deliver these results in a market, where it faces an equally voracious competitor in Google.