Of Course Wall Street Hates Facebook
I’ve seen a few articles in the past few days pondering why Facebook is so unloved by Wall Street. Wired expresses it fairly well: “Wall Street Hates Facebook. No One Knows Why.” Is that…actually any sort of mystery?
Facebook is a fast-growing technology company, which is expected to trade at high multiples of earning to reflect its expected future income. Recently, profit growth has fallen off a cliff (2012), leading many to suspect that earlier expectations of future earnings growth were too high and revising their valuation of the firm downwards. Growth in new users has slowed down dramatically and time spent on the site has begun dropping, suggesting that expectations of ever-higher revenues from increased ad sales might be overstated as well. This is all standard stuff – but Facebook has the additional burden of representing a significant bet about technological behavior in general.
Owning Facebook stock, especially one trading at high multiples, is a bet on two highly uncertain propositions: that user’s time is not close to an exhausted resource, and that Facebook will eat the Internet. The first is pretty simple to evaluate if you care, and less interesting. However, the second is an extremely risky and hard to evaluate. In order to justify its valuation, Facebook has to become the primary means of digital communication and engagement for most of its users. So it won’t just be for stalking exes, but also a email/voice/videochat hub, general search center, review clearinghouse, retailer, etc. Futhermore, it has to do this in a pretty short timeframe because otherwise people will get entrenched in doing this things via other channels.
Facebook even being capable of eating the Internet rests itself on two highly uncertain assumptions – that people want (or will tolerate) a single online persona, and that youngsters will want to use the same social network populated by their parents, teachers, and sundry authority figures. Buying Facebook as a growth stock requires you to believe those assumptions firmly, and then layer on a further set of assumptions about its technology capability, product offerings, competitive position, and so on. And the downside risk if any of those assumptions are wrong? They range from bad to awful – it’s all too easy to imagine a downward spiral of user abandonment that wipes out the entire company in fairly short order.
Facebook stock relies on both hard-to-evaluate competitive market dynamics and impossible-to-evaluate sociological dynamics, and the most plausible (who knows about most likely) downside risk is complete destruction of the company at an extremely uncertain point in the future. It’d be strange if it didn’t trade at a discount, but some people are silly.