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Facebook Lenses

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144 pointsJumpCrisscross29 comments

There's an elephant in the room that is hardly discussed, and that is Facebook's multi class share structure. It upends the basic tenet of stock ownership, which is to influence how a company functions. More shares = more equity = more influence. Zuckerberg is in permanent control of Facebook via his superior class, so the only way to disagree with his actions is to not own shares of Facebook. And since Facebook does not pay a dividend, owners of class A shares have to ask themselves how they expect to profit other than relying on a greater fool to take their current shares off their hands at a higher price.

Just to paint the other side of the picture:

Many institutional investors think Zuckerberg has done a great job running the company, and think he'll probably continue to do a better job than a replacement CEO. As such, they want him to continue to run the company to maximise the value of their own shares. Shareholders actually voted to allow a stock split that would have allowed Zuckerberg to maintain his voting majority while allowing him to reduce his ownership share[1], though the split didn't eventually take place[2].

(Also, obviously this isn't true of all startups. Travis Kalanick was a drag on Uber's valuation, even though he can probably take a lot of credit for its rise.)

These different voting classes are controversial, but it's also important to note what rights are not diluted as well. To wit: you get the same dividends as everyone else (hmm...) and the same rights as other shareholders to the furniture if they go tits-up (also hmm...).

And to me that's the biggest argument against these different classes -- for companies that are unlikely to ever pay a dividend, they call into question what shares actually are, and why they should have value at all.

1: https://www.recode.net/2016/4/27/11586478/facebook-stock-spl...

2: https://www.recode.net/2017/9/23/16354302/why-mark-zuckerber...

Trading at 24x GAAP '19 EPS. A modest premium to the S&P500 for a stock growing EPS at 2-3x the rate of the index. And a company that has a duopoly in mobile advertising. Greater fool indeed!

Indeed.

And apparently people think investors are opposed to keeping Zuckerburg in control because he doesn't have great people skills or something, even though he got that mobile duopoly.

How does the shareholder benefit from these metrics when no dividends are paid?

Most small to mid-sized players see the multi-class structure as benefit since it keeps control in Zuckerberg's hands. Indeed only a very few large players see it as a bad thing - and they are people like Icahn.

Greater fool doesn't really apply while revenue keeps growing.

That didn't really answer my question. What is the benefit of owning FB shares, especially if someone is a retail trader? Quarterly revenue growth is underperforming Apple’s services and it does not have a balance sheet like Apple's. Apple pays dividends and has a conventional ownership structure.

Yeah, fair point. I do agree there is a fundamental issue there.

But the second class shares do have board voting rights etc, so they do have some degree of control. And even Zuckurberg can't ignore his board completely.

Travis Kalanick had a 2-class share system working for him too.

> And since Facebook does not pay a dividend, owners of class A shares have to ask themselves how they expect to profit other than relying on a greater fool to take their current shares off their hands at a higher price.

To be fair, isn't that how most money is made in the stock market?

There's a difference as I explained earlier. In a conventional company ownership structure, owning a share means you can vote on company matters, to elect directors to the board etc. However in the case of FB, the outsized voting powers of class B shares are not available to the public. In other words the shares have no inherent value. An investor might be wiser to invest in FB bonds since they are paid ahead of holders of equity should FB implode.

What the F are you smoking? I'm super glad that Zuck has all the control or otherwise you can count on likes on Carl Icahn to circle facebook like vultures at this point and tear it in to pieces until guts are sold and cashed-in. In fact, I would not buy stock of tech company where visionary founder is not guaranteed to be in-charge. Sure there is 50% chance that they will screw up. But if a VCs or so-called activist investor was in-charge, there is 100% chance of screw up.

> What the F are you smoking

Please don't post like that to HN. It breaks the site guidelines: https://news.ycombinator.com/newsguidelines.html.

Your comment would be fine without the first sentence.

Dividends are merely one of three ways that companies can return value to shareholders.

What are the other two?

Buybacks are one, but I'm not sure what the incentive to Facebook would be to buy back non-voting stock.

Buybacks and mergers.

The latter, of course, is rather unlikely.

I really don't think this is big disaster for FB. In all likelyhood, this is what they exactly want right now - public sympathy for taking flake for otherwise very critical mistakes. FB is known to be able to precisely adjust their quarterly results by simply controlling the flow of ads within certain margin. Zuck didn't said without reason that it would take "3 years" to recover. That timeline coincides with 2020 election + 1 year when this whole hoopla should have been died out and FB will be back to beating street expectations. If mid-term goes smooth then we might even see this earlier. The point here is that FB really has good control of results that they want to deliver.

While I generally agree with this analysis - Facebook's potential growth makes the P/E of 27 look pretty cheap - it ignores the serious decline in use among young people.

In 2016 88% of online users in the US aged 18-29 used Facebook [1], but in the last 18 months that figure has dropped to around 82% [2]. Luckily for Facebook it also owns Instagram, but will it own the next generation's social media app?

In 20 years I'm confident that Star Wars, McDonald's and Nike will still be popular with young people. But will Instagram?

[1] http://www.pewinternet.org/2016/11/11/social-media-update-20...

[2] http://www.pewinternet.org/2018/03/01/social-media-use-in-20...

The FB decline amongst young people is more than made up for by the increased instagram usage.

The real question isn't if FB, Insta or WhatsApp will be popular in 20 years. To a large extent that doesn't matter.

The real question is - if communication on the internet will continue to be a large part of people's lives - are their any circumstances where FB can't buy a new player (or copy and outship it, aka SNAP).

There are circumstances where this could happen - if Tencent decided to go after the US market they could - in theory - build out a FB competitor around the WeChat install base. They are too big for FB to buy, and can ship software just as quickly as FB can. But this is a hard play (as Google learnt), and so it's really just a sci-fi scenario - not the kind of thing which should affect FB's stock price.

From the article:

Facebook spent years building out News Feed advertising — not simply the display and targeting technology but also the entire back-end apparatus for advertisers, connections with non-Facebook data sources and points-of-sale, relationships with ad buyers, etc. — and then simply plugged Instagram into that infrastructure.

Then in the article this argument leads to a conclusion that the fb pre-work saved years of monetisation effort for Instagram. Is it not the case, though, that it took years for the first player but would take much less for the followers as they already know what a solid way to do it looks like and they have consumers who are conditioned to this way? Other than the relationships with ad-buyers, everything else on the list is not easy as in a day's work but would take much less time for someone to rebuild using the established paradigm.

If we look at how the new generation of social platforms are built - in China - then creating the user base is not so hard anymore. Tencent and Bytedance are paying Influencers to use their platform and create content there. Once the user base is built up that way, you introduce advertising.

So many tech stocks are down because of Facebooks “devastating” loss. It’s stupid, the fundamentals of these companies hasn’t changed, some are even better than ever. Buy the dip.

But if the fundamentals haven't changed, what criteria are you using to decide that this is a dip vs. the past 3 months being a spike?

I'm no expert, but a quick glance at the chart looks like they dipped below their 200 day average in March, which resulted in a spike as people bought in, and now it has corrected after less then expected earnings.Yes, it is 10 points under the current 200 day average, so maybe it is a little under-priced, but I don't see anything that guarantees that this is a dip.

User growth is not a fundamental? If you're talking traditional fundamentals, then it was always overpriced.

Facebook slowing means Facebook’s acquisitions slow. That impacts the broader ecosystem.

When that story originally came out this week, somebody crunched the numbers of the percentage of target-age internet users that actually exist, taking out China and other places where Facebook is blocked, and users too young to actually consent to be on there. I can't find it now, but Facebook's user numbers were approaching saturation. So there's not really anywhere to go for exponential user growth, unless you admit that most of your users are bots, and that it's a stupid metric. At some point everyone who wants a Facebook account has one.

Why were they not overpriced before and now only misspriced, when we have more information?

This points to a fundamental misunderstanding of how the stock market works.

People see Facebook reporting 42% increase in earnings and the stock dipping 20% and think Wall Street is crazy. It's not. The revenue growth was already factored into the current price of the stock at the time before the earnings call. When the stock failed to meet the expected revenue and other key metrics, the stock price corrected by some people selling who were expecting better performance.

This is Wall Street 101. The author should know that and not forward the stupid cliche of "The company's revenues were up but the stock tanked, Wall Street is insane!".

Or, if you bothered to read past the Tweet, from the article itself:

a stock price is about future earnings, not already realized ones

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