Facebook: Bears and Game Theory

Instagram is more addictive than crack (I’m only sort of joking). Facebook is a dopamine company. From social media to gaming, Facebook is a constant stream of dopamine. Dopamine is an area of investing that has intrigued me. I believe dopamine companies are investing gold mines hiding in plain sight. But, despite being an endless source of dopamine with amazing financials, Facebook is trading relatively cheap. The bear cases are holding Facebook back, but are the bears right? I’ll run through a few of the bear cases and explain why they aren’t true.

1. Regulation is a big threat to Facebook – What is the threat of regulation? That Facebook will be forced to sell WhatsApp or Instagram? Sum of parts valuation would increase Facebook’s value. Obviously not optimal for the long term, but it would provide a nice short term bounce. If breaking up Facebook isn’t the concern, what would be? The government is bad at regulating; regulation tends to help large companies more than it hurts. Regulation could be Facebook’s largest moat. Biden’s transition team is also loaded with former Facebook employees. From a game theory perspective, I have a hard time seeing an interaction between the government and Facebook leading to a permanent impairment.
2. Facebook is Myspace – Myspace was a social network. Facebook is more than a social network (i.e. Marketplace, business pages, etc.), and it’s getting stickier and stickier. Facebook isn’t Myspace.
3. Facebook is evil – I talked about this idea here. Facebook does collect your data in a very creepy way. They haven’t had the best controls around this data, but they did register millions to vote. They have made Facebook Marketplace, which is much safer than Craigslist. They have connected so many people. Facebook is evil and it’s also good. Facebook is complicated.
4. Only old people use Facebook – The data disagrees, everyone uses Facebook. The older generations are driving new user growth and participation is lower with 13-17 year olds, but this isn’t a bear case… it is proof of Facebook’s scale. If your bear case is only 51.7% of 13 – 17 year olds have a Facebook, then you don’t have a bear case. And if young people aren’t using Facebook, they are using Instagram.

Honestly, the best argument against Facebook is karma and I’m not convinced Facebook has negative karma. I find the rest of the bear cases against Facebook, at best, uninspiring. Can you really imagine a future without Zuck? I can’t.