• Skip to primary navigation
  • Skip to main content

Consolidated Rock Holding Company

Consolidated Rock - Investment Holding Company of Sultan Ameerali

  • Overview
  • Services
  • Latest Posts
    • Investment Ideas
    • Notes and Concepts
  • Portfolio
  • Show Search
Hide Search

Margins succinctly explains the Facebook investment thesis

August 2, 2021

It’s too bad I find Facebook and its various platforms toxic and untrustworthy. I won’t touch the stock, but it’s going to make anyone smart enough to buy and hold a lot of money over the next few years. As Ranjan Roy explains in his newsletter, the cost per ad on Facebook is “skyrocketing.”

More importantly there is no way to significantly increase supply. Network effect, combined with basic supply and demand fundamentals, resulted in a second quarter profit of US$10.2-billion with more to come for the foreseeable future.

Facebook only delivered a total of 6% more ads in Q2 while prices went up 47%. When the majority of people in the world already use your products, there are only so many more ads you can cram into user feeds without completely destroying the experience (the technical term for that challenge is ‘ad load’).

But we also have a situation where digital ad spending is rapidly growing and there’s no end in sight. Even in 2020, with a severe economic contraction, digital ad spend grew 12%. In the last two quarters, brands that had cut budgets are back with a vengeance. Travel, leisure, and every service benefiting from the economy’s re-opening is back spending. The rise in online commerce has also meant brands who traditionally spent big on analog media are shifting more towards digital platforms.

There’s more and more money chasing a relatively stable supply of goods. Prices are increasing but no one is going to leave Facebook.

Ranjan Roy, Margins Newsletter

For value investors that can parrot Warren Buffett aphorisms without truly understanding them – this is the moat you’re looking for.

When you make US$10.2-billion per quarter, regulatory risks that can’t be watered down or eliminated are probably overstated. That same cash flow also buys a lot of R&D capacity to increase engagement through moonshots like virtual reality, augmented reality and Diem. However as Microsoft has proven for the last 30 years, (WordPerfect vs Word, Netscape Navigator vs Internet Explorer, Slack vs Teams) when you own the market you really don’t have to be original, first to market, or even have the best offering. It’s enough to be a good fast follower and let your market share close the gap. Facebook Marketplace is a viable competitor to eBay because it’s combined with the existing user base. Instagram stories may have started life as a Snapchat ripoff but that hardly matter now. Five years later the war is over and Instagram stories on its own is worth more than all of Snapchat.

Unlike Snapchat, which always felt more intimate — private photo and video messaging is still its top use case — Instagram Stories took advantage of the fact that hundreds of millions of people had already created an enjoyable Instagram feed, following friends, family, local businesses, celebrities and influencers. So there was a built-in audience from day one, and a healthy supply of Stories to watch. 

Instagram also put Stories right at the top of its app, making it the first thing everyone saw when they opened Instagram. It remains there.

One thing missing from Instagram Stories was a re-posting feature — it was hard for something to go viral in Stories. But users quickly improvised, re-posting screenshots from others’ Stories on their own, often with annotations or comments.

Recode, ‘Stories’ was Instagram’s smartest move yet

Complaints that Facebook has stopped growing its user base in developed markets miss the point that nobody is coming along to displace them. Owning 100% of the most lucrative ad market in history is a good thing. Owning 100% of the most lucrative ad market in history and forcing advertisers to bid against each other for access is even better. Leveraging that market dominance to launch new businesses and kneecap social media innovators is just gravy.

My other takeaway is that Facebook is no longer in competition with Google and Amazon, if it ever was. Instagram and the core Facebook experience are pure pay-to-play ad platforms where the most effective ads keep people inside the environment and there’s no way to surface organic content to new customers at scale without paid promotion. Google and Amazon are fighting for customers showing buying intent. To digital marketers those are distinct markets requiring different lead funnels.

Disclosure: No position in Facebook, because I’m either stupid or a hypocrite. I’d rather bet on a supply/demand imbalance in copper, oil or uranium than an undersupply in digital ad inventory.

Filed Under: Investment Ideas Tagged With: Facebook

Recent Posts

  • Video: Higher metals prices explained
  • Senvest Capital exits crypto investment
  • Options trades: Equinox Gold

Recent Tweets

Sultan AmeeraliFollow

Investor. SEDAR is your friend if you can get the damn site to work. Don’t buy any stock because I mentioned it. Boxer, reporter, author in a different life.

Sultan Ameerali
SultanAmeeraliSultan Ameerali@SultanAmeerali·
2h

I took a small position in $AUY. I think Marrone and team are incentivized to close the deal and cash a fat CoC cheque. If it doesn't close, Yamana ends up collecting a break fee worth 10% of the current market cap.

Reply on Twitter 1544768988055539713Retweet on Twitter 15447689880555397131Like on Twitter 1544768988055539713Twitter 1544768988055539713
SultanAmeeraliSultan Ameerali@SultanAmeerali·
2h

Looking under the couch cushions for cash to buy more $UAN. I can't think of a plausible bear case on any kind of medium-term timeline. Same thing applies to Canadian banks, which have reserves to withstand the apocalypse.

Reply on Twitter 1544767307276337152Retweet on Twitter 1544767307276337152Like on Twitter 15447673072763371525Twitter 1544767307276337152
SultanAmeeraliSultan Ameerali@SultanAmeerali·
5 Jul

“It’s too hot today.”

The Simpsons@Simpsons_tweets

"Oh, I'm sorry. I can't divulge information about that customer's secret illegal account."

Reply on Twitter 1544356253627203584Retweet on Twitter 1544356253627203584Like on Twitter 15443562536272035841Twitter 1544356253627203584
SultanAmeeraliSultan Ameerali@SultanAmeerali·
4 Jul

“In other words, they’re not allowing clients to invest in those cash ETFs so that they can raise more, cheaper deposit capital.”
https://www.theglobeandmail.com/business/article-banks-block-etfs/

Reply on Twitter 1544010439499153410Retweet on Twitter 1544010439499153410Like on Twitter 15440104394991534101Twitter 1544010439499153410
Retweet on TwitterSultan Ameerali Retweeted
TraderNoahNoah Goldberg@TraderNoah·
4 Jul

profitable trading strategies with low hit rates seem to be one of the easier ways to make money.

1. people are bad at analyzing probabilities of low probability events
2. people have aversion to losing

Reply on Twitter 1543988766158848002Retweet on Twitter 15439887661588480022Like on Twitter 15439887661588480026Twitter 1543988766158848002
Load More...

Connect:

  • Email
  • LinkedIn
  • Twitter

© 2021 Consolidated Rock Holding Company

  • Disclaimer
  • Amazon Associates Link
  • Privacy Policy and Terms of Use
  • Contact