Is It Time to Short Facebook?

Andy Snyder|October 7, 2021

The world’s most dangerous company has had a heck of week.

First 60 Minutes… then a huge outage… and then a disgruntled employee telling all (including maybe even a fact or two) on Capitol Hill.

Betting against Facebook (FB) has never been a smart move. It’s a billionaire-maker that’s more than tripled in value over the last five years.

But some peculiar things are happening that have us pondering its future… and worried about its shareholders.

We’ve long said the social media site should come with a surgeon general’s warning. At first, our cries sounded hyperbolic… like we were screaming at the rain.

But now the drains are clogged, and the water is starting to rise.

Accusations

Citing half-cocked Facebook survey results that show 20% of teenage users in the U.S. feel worse after scrolling through the platform, the former-insider-turned-whistleblower who babbled to Congress this week compared the company’s social media platforms to cigarette smoking.

“In the case of cigarettes, ‘only’ about 10% of people who smoke ever get lung cancer,” she said. “So the idea that 20% of your users could be facing serious mental health issues and that’s not a problem is shocking.”

That’s the kind of comment that gets attention. In fact, Facebook is already refuting it.

But that hasn’t stopped the mainstream media from tilting its spotlight on Facebook’s algorithm.

The company’s computers are smart. They know you better than your mother does.

The algorithm knows what makes users stop scrolling. It knows what interests them. And it knows what will get them to come back in half an hour.

But here’s the thing.

It’s something we all know to be true.

Humans have a dumb tendency to like the things that do us the most harm… like cigarettes, booze and free money.

Facebook’s accusers say the company purposefully serves up the stuff that’s bad for us – the stuff that stirs violence, spreads hate and makes users more insecure with each fresh scroll.

But who can blame the company? Its revenue plunges when it serves up the healthy stuff.

Changing the algorithm would be like Hooters suddenly tossing the girls some sweaters and installing a salad bar.

Folks will go somewhere else for their eye candy.

And that’s the problem with Facebook. It’s grown “too big to succeed.”

The company can no longer do what it’s done to stay where it’s at. Without a truly innovative and creative solution that keeps folks addicted, the pressure pushing down on the company will be too much for its shares to maintain their current updraft.

But here’s what has us worried about that claim…

It’s the same reason cigarette-makers still pull in billions of dollars each quarter…

Folks are addicted.

It’s one thing to know social media kills the brain. It’s a whole different thing to do anything about it.

So it’s not the user (aka the addict) who will change Zuckerberg’s fate.

It’s not the government, either – nor should it be.

What will ultimately send shares of Facebook lower are the folks who truly drive its business… advertisers.

Flatlining

As you know, we’re part of several businesses. We’re also involved in some entrepreneurial groups.

Facebook’s outage on Monday reminded many of the folks we work with about something we’ve been saying for years…

Do not build your business on the back of Facebook.

We know several firms in our sphere that either derive the majority of their sales via the company’s platforms or, even worse, run their businesses entirely on those platforms.

For them… Monday was a day of thumb-twiddling and brow-wiping.

All across the entrepreneurial spectrum, these folks had a “come to Jesus” moment when they realized that one programming error – or algorithm change – could destroy their business.

Some will likely go back to their old ways. Easy money is tough to turn down.

But many will find newer and smarter sales conduits. They’ll diversify.

It won’t destroy Facebook, but it will slow it down. So will the pressure from Congress. And so will the folks wise enough to see the harm that’s happening to them.

Add it all up, and we see a business that has a struggle in front of it.

Unless it gets ultra-creative and launches a suite of evolving products, we say it’s reached its high point.

Best case, sales climb single digits (down from the 20% growth we saw last year)… as we’d expect from a major company of its size.

Worst case (at least for shareholders), users wise up and “cancel” the company and its troubling products.

Our take?

Facebook will run flat. That’s bad news for shareholders and – this is important – folks who own tech ETFs that are heavily burdened by Facebook’s shares.

There are better things to invest in… things that don’t require a surgeon general’s warning.