Invest-ability daily 05/10/21: Burning Facebook

Is Terry Smith about to be proved wrong on the social media giant?


Apparently, Facebook and other apps owned by the social media giant suffered a major outage yesterday. I say apparently, because I was blissfully unaware of the whole saga until I was browsing Twitter later in the evening – I stopped using Facebook years ago, somehow ended up with an Instagram account which I don’t use, have never tried Messenger, and gave up on WhatsApp a couple of months ago when my iPhone died and I replaced it with an old-fashioned Nokia (aka a ‘burner’, as aficionados of ‘The Wire’ may call it).

I have no idea how Facebook managed to temporarily delete itself from the internet, but it puts my constant fear of accidentally deleting into perspective – unlike us, it has 1.8bn daily active users across its platforms, and a market cap of $920bn with all manner of investors small and large including, controversially, Terry Smith. Its shares fell nearly 5 per cent yesterday, although when set against the broader performance of the Nasdaq yesterday that’s hardly terrible – 27 stocks in its top 100 suffered falls of 3 per cent or more.

Indeed, a quick look at Fintwit reveals plenty of investors rubbing their hands and ready to buy the dip again– a familiar response to any weakness in the US market, and particularly tech stocks, in the past year or so. So far, they have been largely right, and there is no better example of that than Facebook – it’s shrugged off scandal after scandal and its share price has powered higher and higher, hitting an all-time high of $382 a share in early September.

Along with the broad tech sell-off, specific pressure continues to mount on Facebook, though. Yesterday’s technical hitches seem small beer in comparison to the regulatory pressure it’s facing – it’s come to light that it supressed research that pointed to mental health concerns among young women and girls using Instagram, and it’s since suspended a planned launch of Instagram Kids. And on Sunday, a whistle-blower – data scientist Frances Haugen – surfaced on US television and is due to appear before already angry senators today. She claims the company has put “profit before safety” with its algorithms, specifically arguing that the company has tweaked them to promote divisive content that users are more likely to engage with – and thus help Facebook sell more advertising.

Indeed, Facebook is very profitable, and its shares aren’t that expensive if you strip out its chunky cash pile. And as Terry Smith has pointed out, it’s still growing very fast and generating great returns on capital – and, as one of its top 10 holdings, great returns for Fundsmith too. He has also argued that the regulatory threat to the broader social media industry has strengthened rather than weakened Facebook’s position, stopping the emergence of potential competitors. And, as he pointed out in a 2019 interview with Citywire in the wake of his controversial purchase, “there is a danger of all of us working from personal anecdote rather than data” – indeed, I might not like Facebook, but I don’t see many people using burners rather than smartphones (full disclosure: I also have an iPad, but WhatsApp doesn’t work on that).

But perhaps the data is emerging to support the anecdotal view that has led me to largely abandon social media and actively discourage my own children from using it – just as I have heard it said that many in Silicon Valley take the same view of the products they sell, banning or limiting their kids’ use of “addictive tech”. Indeed, some have suggested that Facebook’s behaviour, and the behavioural impact of its products, are akin to the tobacco industry of the past. If politicians in the US also take that stance – and perhaps, more importantly, Facebook’s customers join them – that may put Mr Smith’s view to the test. And we’ll be seeing a lot more burners again

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