This Earnings Season Facebook Meets Reality – No Headset Required

There’s probably no other company that represents the “new” Silicon Valley identity and meme than Facebook™. Since its inception the investment story, along with its user metrics, has been a tale for the ages. No matter where one turned it seemed Facebook (FB) could do no wrong. Ever. The original idea along with just how fast it grew with its ubiquitous adoption and application was a match made in heaven for Wall Street. And with that it did the inevitable and went public in May of 2012.

The story since has always been the same: User metrics of growth spun in ways that would make a washing machine blush; promises of future riches – in the future; and stories to fortify why Mark (I’m using the personal only for ease) was not only a genius to spend $Billions upon $Billions of investor capital on outrageously overpriced acquisitions; but also – why he could (or would) continue at an even more aggressive pace. Well, that was then and this is now. And guess what? It’s different this time.

I’ve been quite vocal over the years in trying to bring some reality back into any business arguments when the subject matter pertained to FB. I’ve never argued that FB wasn’t a valuable or useful platform when put into its proper perspective. However, with that being said, I have been left both speechless, as well as mystified, on the arguments and rationale coming not from the casual business acquaintances I may be speaking with. No, the most jaw dropping explanations are from either the next in rotation fund manager or, self purported Silicon Valley aficionado clamoring for a camera, microphone, or keyboard to express why FB is “fairly priced” or better yet “completely reasonable.” The valuation at that period of time? A mere $300+ BILLION with argued assumptions why it should be worth even more. Read that last line again while trying to rationalize that argument juxtaposed to the following:

FB has been worth more (as in market cap) than any of the following: GE™, Johnson & Johnson™, J.P.Morgan Case™, Walmart™, General Motors™, Ford™, Home Depot™, Disney™, Visa™, Boeing™, 3M™, and for the sake of brevity I’ll stop there for there are only about another 450+ more. And that’s just the S&P.

So, using the a fore-mentioned as a template or construct for any comprehensive objective reasoning – ague why a company that manufactures “likes” is worth more than say 3 or 4 times the value of a company like General Motors that actually manufactures vehicles that customers need to like then actually pay for? Or, how about arguing why “likes” are worth more than 2 or 3 times the amount of a company that manufactures aircraft that people like as in Boeing? Or better yet – why “likes” make this company worth more than a TBTF (too big to fail) bank such as J.P. Morgan Chase? But wait, wait! I can hear through my monitors: “What about all that data mining and eyeballs for ads? Surely this is where the value lies.” Sure it is…

Back in September of 2015 as the likes of FB and a few others were reaching ever higher I made the following observation:

“Sooner or later Wall Street is going to come knocking for either its promise of profits. Or, its money back. And when that starts (which I believe has already begun) the mad-rush to cash-in what ever value a share might have that day will be assailed with stunning speed. Much like the commodity space where stalwarts of an entire sector can find themselves struggling for solvency in mere months.”

As is usually the case this was met with consternation and ridicule from not only the financial media, but from many within Silicon Valley itself. Just questioning these valuations, let alone anything more, brought out a fury of deriding anger. After all, the narrative of “user growth” et al had been the currency for minting investment dollars ex nihilo in much the same way the Federal Reserve’s QE (quantitative easing) initiative made that fairy-tale a reality providing the “hot money” in much the same fashion. But the fairy-tale dreams have ended along with QE and the waking reality of an ever-increasing nightmare on Wall St. is now unfolding.

As I’ve iterated countless times before there has been no other commodity mined than that of “data” for everything social. And FB has been the undisputed leader in this category. Yet, just like real commodities (such as iron and others) there does come a point: unless there’s a real-use/demand for it – its value can become less than worthless.

For those who think such talk is preposterous (for they’ll contend things never lose a value below zero) one should remember: When it costs more to dig or produce than it can be sold for – how much is it really worth? And just like the commodity complex itself is finding its narrative as well as terminal value falling further and further as hopes of a turnaround get cut and slashed ever more (e.g., using the latest Atlanta Fed. report cutting GDP lower, again!) So too I believe is this about to hit FB as well as social media as a whole this earnings cycle in a way that the entire complex never anticipated. For the “canary” many still avert their eyes from within this commodity mine is Twitter™.

If one wants to see how dangerous these data mined, eye-balls for ad-dollar shafts have become there’s been no better proverbial songbird in my estimation than Twitter itself. And how is this “canary” doing as of late? Flat on its back, in the bottom of its cage possibly comatose is not that far off as a description. For this week not only did its stock price fall ever further, it now has reached a status never before seen in its public life: It’s now a “teenager.”

And no, that’s not good in a way one might think at first blush inferring it’s growing up from adolescence. No, this is the opposite where your $30+ stock investment falls and now sports a “teen” moniker as in $19 and change. And if things don’t change soon the term or moniker “adolescence” may have more in-common with the stock price than many bargained for.

Currently FB has fallen some 10% from its recent highs of a little more than a month ago. ($107+ to $97 and change today) and if the charts are to be believed – there’s plenty of pain left-to-be-had in the upcoming future. However, that’s from a technical view derived from charting analysis. Many will argue “technical analysis” has more in common with chicken bones than anything fundamental. And it’s a fair point, however, what happens when you correlate the “technical” with the narrative? Suddenly things look far more onerous as well as “fundamental.”

FB’s narrative about organic growth, user engagement, yada, yada, ya will of course be front and center as well as other important metrics to compare, contemplate, and extrapolate inherent value. However, I believe that narrative this time must change as to show bona fide, easily verifiable, value metrics to all that data in ways FB has never been made to address before. As I’ve stated previously: An increase of 100, 200, or 500 billion eyeballs is worthless if none of those new eyeballs converted into adding $1 of net profit for either the advertiser or FB. Period. Because – if the ads don’t or didn’t convert; the advertiser will sooner than later go where they will. And as go the advertisers – so goes FB. $300 Billion market cap or not.

Last earnings cycle the QE hangover along with the reality of the oncoming knock-on effects of a rate increase hadn’t yet been placed front-and-center into the mind of the “everything is awesome” crowd. That has now changed. Suddenly “making money” is morphing into “saving it from possible oblivion.” The narrative of “invest for the long haul” loses its charm when today’s nouveau investment cadre made up of Angels and Venture Capital watch dollar after dollar vanish into money heaven.

If you want more evidence on just how fast things can change just look to Square™ or Match™ today for any predictive insight. If you want to see something that may show you today, what may be in the future, just look to the past and think – AOL™. For there’s no better prescient representative to the “it’s different this time” narrative that FB may face this earnings cycle in my opinion. You’d be surprised just how much these story lines rhyme. That is, if you actually want to see.Yet there’s one more that will also be front-and-center this time that hasn’t been previous.

No, it’s not just how much Mark is still going to spend of FB’s investor capital. Although it’s important, it’s currently not the most prevailing. No, what’s truly different this time, as well as much more important, is a question that has never before been needed or contemplated but surely; will be front-and-center of every analyst, as well as current share holder of FB. That question?

Just where and when is Mark selling his FB shares?

© 2016 Mark St.Cyr