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Subject:  Re: sell cheap but no fizz? Date:  7/26/2018  3:36 PM
Author:  EightTrack4 Number:  2855 of 3782

Buy or sell?
i.e. did you get a better bargain (buy) or avoid today's rout (sell)?

I purchased additional FB in extended trading last night.

Originally I established a terribly small position after the Cambridge Analytica scandal and told myself that I would add if given a similar purchase opportunity. Even today it's a very small position.

Certainly in relative terms to the SP500 I think FB is a fantastic bargain and in absolute terms I think it's a solid deal particularly on a risk-reward basis(20% return for a few years?), although my lack of knowledge in this area is significant and my small position sizing hints at my comfort level with social media.

I emailed these thoughts to a friend earlier this morning (I also don't think all R&D should be expensed and FB profits are perhaps understated):

1) I don’t know why the CEO led with the currency issue first when explaining the reason for decelerating revenue growth in the near-future. Leading with currency is always a yellow flag. Moreover, the entire management team did a poor job of signaling the potential upside of the ‘Stories’ transition and further Whats App and Instagram monetization. It was so bad that I am tempted to believe that this was a purposeful kitchen sink quarter meant to reset expectations to a very low level.

2) The way I see it the crucial issue is user engagement. The golden goose is maintaining and strengthening user engagement and near-term profit should be sacrificed if action can be taken to further increase user engagement on the various FB platforms. Thank you again for forwarding me that Zuck interview and I thought of this passage during the earnings conference call:

Longer term, as a technologist, one of things that just excites me is there are always new computing platforms. Every 10 or 15 years a new one comes along. They’re always more native, they capture your human experience more. Immersively, you share more naturally what you’re experiencing. I just think that VR and AR are going to be a really big deal. You can just see this trajectory from early internet, when the technology and connections were slow, most of the internet was text. Text is great, but it can be sometimes hard to capture what’s going on. Then, we all got phones with cameras on them and the internet got good enough to be primarily images. Now the networks are getting good enough that it’s primarily video. At each step along the way, we’re able to capture the human experience with greater fidelity and richness, and I think that that’s great.

Now, I do think that we’re gonna move towards this world where eventually you’ll be able to capture a whole experience that you’re in and be able to send that to someone. I think that that’s just gonna be an amazing technology for perspective taking and putting yourself in other people’s shoes, for being able to feeling like you’re really physically there with someone even when you’re not. One of the criticisms of technology today is you’re sitting and looking at your phone, and we could be sitting together but we’re actually fragmented.

Although I am not an active Facebook user (I do use Instagram quite often but as a spectator) it seems to me that the legacy Facebook is too “text” and “photo” dependent and the Zuck is following through on his vision to transform it to video and beyond. If he succeeds, this should increase user engagement and ultimately increase the value of each platform user to Facebook and advertisers. I think FB stock sellers at this price are acting very short-sighted. Sheryl and Mark did a poor job of expressing this upside on the call although I am sympathetic to a degree because the next question for the analyst community will be “On what exact date will all this good stuff occur?” and the answer evidently is, “We’re not sure yet” which analysts despise.

3) As AI improves the efficiency of policing content should get easier and more efficient … I’m not worried about the short-term cost.

4) European privacy rules from what I understand hurt the big boys much less than start-ups and small competitors; regulation tends to entrench incumbents like Facebook.

5) Given the large cash position FB is trading at a very enticing EBITDA multiple, I am enthusiastic about stock repurchases at the current price, and I also think the risk-reward setup is particularly attractive.

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