Facebook’s EPIC Run Comes To An End

These days, I’m Crypto 24/7. But once in awhile, I’ll write about something else if I have a cogent thought.
I’ve been following Facebook’s run since it’s birth in 2004. I was running Bolt Media at the time, and we were the largest social network in the world for a brief time in between Friendster & MySpace. I was buying websites started by 16, 18, 20 year old kids, and I was the first person to call Mark and offer to buy the company, when he had about 1,000 kids at Harvard on it.

By late 2009 there was a fairly active market in Facebook shares, and I got the opportunity to buy some in a secondary transaction at $16 billion. Having been an equity analyst at Goldman before Bolt, I assumed I was as qualified as any one on the planet to value Facebook. I was shocked when my back of the envelope analysis yielded a $50 billion value for the Facebook at the time.

So I bought the shares and felt compelled to write a research report on Facebook. I spent the better part of three months working on the report. A challenge I had to solve was getting to know Zuckerberg, and if he was really a guy who could execute at the highest level. A highlight of those three months was hanging with David Kirkpatrick, who was given unfettered access to Zuck as he was writing the book The Facebook Effect. David got me very comfortable with the awesomeness of Mark.

On Feb. 28, 2010, I published my Facebook research report on Track.com, a subscription website started by a friend, and a few days later I opened up a Tumblr blog and published it there. I said it was worth $50 billion at the time, on it’s way to $100 billion by 2014. For my revenue forecast, I simply took the trajectory of Facebook’s % of total internet time spent on the site, extrapolated that out five years, and multiplied that % by estimates of the total global internet advertising market. My 2014 revenue estimate of $12.3 billion was off the actual 2014 revenue of Facebook by 1%. For a brief while, I went back to Wall Street as a “Social Media Analyst” where, about six months later, I upped my valuation of Facebook to $200 billion (per this clip of me on Bloomberg TV in late 2010)
I rarely write anything negative about a company. What’s to gain from that? But on Feb. 5, 2017, in this Medium post, I called out Snapchat for not releasing the trajectory of their engagement in their S-1. They just gave a snapshot. On Wall Street I quickly learned that when people have good numbers to show, they generally share them. I ended the post about Snapchat by saying “…investors beware.”

So far more than eight years now, I’ve been a massive Facebook bull. But today, for the first time in its history, Facebook reported declining user engagement. My simple view has long been, that you’re either growing the engagement of your user base, or your dying. It could be a very long, profitable death. But decreasing engagement is hard/impossible to turn around.
A good analogy to user engagement is sharks, per this classic Woody Allen scene from “Annie Hall”
So to paraphrase Woody Allen, “Social media companies are like sharks, they’re either moving forward (i.e. increasing user engagement), or dying. And what we have here, is a dead shark”.

But kudos to Mark and the entire Facebook team for an EPIC EPIC run. As of the close today, before earnings were announced, Facebook was the 21st most valuable company listed in the U.S.. Interestingly, revenue growth is a lagging indicator of engagement growth. In other words, Facebook’s revenue will continue to rise for a few quarters before it mirrors the decline of Facebook’s user engagement. So the shares are likely going to perform well for a few more quarters. I’m also sure were going to see a lot of great innovation from Facebook’s massively talented team. But the user engagement run that has powered Facebook’s stratospheric rise in valuation has come to an end, ….. investors beware.