Apr 2021: Facebook – GARP fishing

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Facebook Inc – GAR[1]P Fishing

Apr 2021 ($310)


Some of you will remember a report we wrote on Apple in January 2019 (Holland Views – Apple: Sticky, Loyal and Rich). It is one of the research pieces we are most proud of. Not just because the shares have tripled since but because it encapsulated the essence of our investment process well. That is to say we don’t think we just got lucky in identifying a great business that was clearly mispriced (read it again if you don’t believe us!).

What was maybe interesting about our Apple call was that it empowered us, as generalists, to have confidence in taking a high-level ‘Forest for the Trees’ view on a stock when we think appropriate. We did this also with PayPal, Boohoo and Schwab.

Today we offer a perspective on another stock that previously we may have deemed ‘too hard’ – Facebook Inc. That said, this is an uncomfortable call which prompted a lot of the usual internal analytical friction! That the stock has rallied 20% since we started working on the idea is unfortunate, but it does not deter us from sharing our findings with you.

Our stance is summed up as follows:

  1. Facebook Inc. (FB, more pertinently the Facebook.com, Instagram.com, Messenger and WhatsApp platforms) collectively has >>2.5 billion active users. FB is thus the equivalent of a de-facto global digital Town Square. What is more, FB knows more about its users than any other direct advertising medium and it makes a fortune from this knowledge. Yet FB’s market cap is just 60% of Alphabet’s.

For a huge cohort of the platform’s users (seeking community, profit or fame) and advertisers (seeking attention and monetisation for brands), there just is no comparable alternative on a global scale. As scale begets scale, begets innovation and begets pricing power, we see FB as a unique global utility-like platform business dominating long into the future – a rare bird.

  1. FB is a business that we think might be ‘pregnant with profits’. In plain English we think the massive gap of ARPU in the US ($53) vs. Asia ($4) reflects wide gaps in regional GDP and advertising spend. The rising tide of the rest of the world economies should offer substantial future ARPU and subs growth to FB in due course (analogous to Coca-Cola Co in the 1980s?). On top of this is the ongoing and fast-paced shift of FB beyond advertising into e-commerce.
  2. In this context, FB’s share valuation perhaps takes on a new light. OK, FB is nowhere near as reasonably priced as Apple was back in 2019 (can you believe Apple was on 10x?!). Still – in the context of a mega duopolist with huge runway of growth, c.22x P/E[2] for 20% prospective earnings growth seemed not an egregious valuation. This is also a business – long assumed to be capital light – that actually reinvested 50% of its net income in each of the last 3 years and is likely to buy back significant stock with excess capital in the future.
Our approach to this complex business

Calling oneself a generalist is not an excuse to avoid the hard work of due diligence on an idea. We have read lots on this industry (including four books that we highly recommend[3]). That said, just like we had not undertaken ‘channel checks’ on iPhone pricing etc. back in 2019, so too today we say upfront – we are not over familiar with global advertisers’ thinking regarding allocation of advertising budgets to FB, Google et al. Nor, frankly do we understand the minutiae of ad auction pricing (the mind boggles on that one). Neither of us have ever been Facebook users either (though both our wives are!). That all being said, we know a good business when we see one.

In researching FB the amount of articles and books on the company and its Silicon Valley peers is vast. Most of the recent “analysis” focuses on the gossip of how some college kids turned into billionaires, how they are secretly surveying the world or how the regulators are going to kill the business. In addition how the platform today is out of fashion, no longer used by younger Americans and perhaps therefore set up for decline. In short, most of it focused on the trees, not the forest.

We saw a very different company when we looked at the big picture. We focus on three areas:

  1. Digital Ads: a proper growth market. But investors seem wary?
  2. Facebook as the global digital Town Square
    1. Asian ARPU catch up
    2. The importance of Groups
  3. The next leg: Pivot to e-commerce
A proper growth market

The digital ad space is a big, opaque and a complex beast of a market. We promised a Forest for the Trees note, so we will try to keep our observations brief in this area. John Malone knows a thing or two about the media business so his comment below sets the tone, maybe!

(Facebook has) the best business model ever created” – John Malone, CNBC, Nov 2016

If you want to find a proper growth market, digital advertising is great starting point. Worldwide spending on digital advertising was c.$150bn in 2015 and this year is expected to reach c.$440bn[4]. Simply put, there are not many $400bn markets compounding at a 20% clip in this world. That digital ad spending still only accounts for 60% of total worldwide ad spending suggests that this is far from a saturated market. Fig.1 below shows the increasing domination by the major platforms in that spending. In the US, that dominance is even greater with FB and Google a clear duopoly with closer to c.80% share! In case you were wondering, FB has compounded revenues at 42% since its 2012 IPO!

Senator Hatch: “So, how do you sustain a business model in which users don’t pay for your service?”

Zuckerberg “Senator, we run ads,”

Fig.1: A huge market, getting bigger

Large platform dominance Share of annual ad spend Google Alibaba.corn• amazon Source: eMarketer 23 18% 2018 Traditional media 'Other' digital media 50% 2019 37% 2020 18% 2021 18% 2022 ebiquity  Source: eMarketer

The following excerpt from a newsletter offered a useful comparison of the digital duopolists. It caught our eye as the title was “Everyone Hates Facebook”! Again and again we read the term aggregator to describe FB’s model – and it is a great way to describe the business. FB aggregates consumers by offering services from news to community sharing, promotion, messaging and e-commerce. On the other side, it then aggregates advertisers (businesses and ad agencies) and offers them the profiling tools to select and find their tribe, their chosen demographic or simply their audience.

There are a lot of good business models on the internet, but Facebook’s might be the best of all. To understand why, it’s helpful to compare Facebook’s business with Google’s. Facebook makes money by aggregating consumer attention and data through its four main properties, and selling both to advertisers so that they can reach the right people with personalized ads. Facebook and Google are the only companies that Ben Thompson refers to as “Super-Aggregators”: This, then, is a super-aggregator: zero transaction costs not just in terms of user acquisition, but also supply acquisition, and most importantly, revenue acquisition, and Google and Facebook are the ultimate examples. In other words, Facebook has almost zero marginal costs – they don’t pay to get me to use their products, I go there to see my friends’ content (which Facebook also doesn’t pay for), and advertisers self-serve through Facebook Business Suite without talking to an expensive sales person. 

While Google is intent-based – I search for shoes and Google serves me ads for companies that make shoes – Facebook is interest-based – I am a 24-35-year-old male with feet who likes running, so companies that sell running shoes can reach me and others like me across Facebook’s properties (and on other sites via its Audience Network). Google can show me different variations of something I want, Facebook can show me products I didn’t even know I wanted. ‘Notboring’ newsletter, Nov 2020 (emphasis ours)

So, simplistically, we have in FB, a duopolist (especially in the US Market). Consequently you would expect commensurately high profitability. Sure enough, as per Fig.2 (RHS), FB Inc. enjoys exceptional profit margins >45% at the operating line. The comparison to Google’s margins is quite interesting though.

Google, seemingly deemed as the superior business by most of Silicon Valley and Wall St (thanks to its engineering prowess and de facto monopoly in search), actually has a lower margin structure.

Fig.2: Beautiful profit margins

Source: Holland Advisors

This is revealing to us. Google’s lower gross margins reminds us that Google partly pays for traffic (not least the estimated >$12bn it pays to Apple annually for inclusion as an iPhone/IOS search app). This highlights a possible Achilles heel for the social media platforms which is their lack of ownership of the underlying hardware upon which users activate their apps(phones). In short, they don’t own the distribution.

Whilst Google worked around this partly through its savvy Android ecosystem development and deployment, today’s ad platforms largely rely on third party distributors (i.e. phones and PCs) to allow their business counterparties (users and ad buyers) to engage. In this light, Zuckerberg’s recent pronouncement that Apple is his #1 competitor is more understandable. There is no question that Apple’s launch of IDFA (improved app privacy) is certainly a headwind for FB this year. Perhaps the recent settlement with Australian media content owners also suggests that FB’s margins might be in the crosshair more broadly than is realised.

“I do want to highlight that we increasingly see Apple as one of our biggest competitors” Mark Zuckerberg, Q4 2020 investor call

Whilst we are very mindful of these risks, we feel their real ultimate impact is overstated against the 20% pa growth potential (Fig.1) and those profit margins (Fig.2)

Investor resistance – is it digital snobbery bias or just out of touch?

It sounds odd to say that a company now trading on 26x earnings is out of favour with the market, but if John Malone is right – that this is one of the most unique businesses ever – shouldn’t this stock trade on an even higher multiple considering its margins, returns and growth prospects? For a business with such growth and profit attributes, in this market, yes we think FB stock warrants much closer attention. Hence the GARP title.

We wonder whether investors have a bias against Facebook. Apparently, social media apps (as distinct from Search) have a much higher usage among females than males and our anecdotal observations would support this assertion. We have read too that Twitter is one of the few social media apps with higher male adoption than female (again, makes sense when we consider: https://twitter.com/andrewhollingw). Given that the Facebook core product is designed for the masses, it seems likely your average 45 year old male equity analyst might have a bit of condensing disdain for it…? Readers of our work on Greggs and Wetherspoons know that we love it when this happens i.e. when the financial community is out of touch with what the woman on the street likes!

Fig.3: Showing your biases (or, 1.5bn people must be wrong!)

Barry Ritholtz @ritholtz I just went on Facebook $FB for the first time in months. Its a horrid wasteland of spam, nonsense and advertising, HowTF is this still a thing? 4:53 pm • 20 Feb 2021 • Twitter Web App Likes 270 Retweets 61 Quote Tweets 3.871 Source: Twitter

This disconnect between the Facebook we hear about at work or read about and the one we see experienced at the other end of the sofa is what piqued our interest originally. Of course, we realise that privacy matters and that sharing an individual’s personal data is not a way to endear users to you. However, Facebook users today chose voluntarily to give more and more of their information and preferences away through their membership of Facebook Groups. This is an important fact we think perhaps lost on some investors and regulators. If such a Group of say, skiers were to be shown ads for hedge trimmers that would be both pointless to the company running the ad but importantly also annoying to the user. That the 600m or so users of Facebook Groups are voluntarily giving their interests and that such profile data is valuable to marketers is very important to consider when the true risk of regulation or privacy control is being assessed.

And a brief word on digital ad technology

We mentioned above how “the mind boggles” in understanding digital ad auction technology – the process by which the digital ad industry captures and aggregates its users’ digital footprint, converts it into a monetisable profile and auctions it automatically via an real-time digital ad exchange. One of us is a trained engineer and worked in the tech industry in a former life. Yet following the data trail that is created and hoovered-up by these ad companies is simply bewildering. In short, it seems to us incredibly difficult if not nigh-on impossible task for the regulators to keep pace with these ad platforms as the technology is moving so fast and is so opaque.

Whether ethically or morally this past use of data is right or reasonable is a moot point (we each have our personal views). However from a business perspective, the ability of the tech companies to stay ahead of regulators and reinforce their dominance (and profits) should not be under-estimated. We’d bet on the platforms staying ahead in the regulatory battle, but importantly not because of tactics or power but because consumers like the product that they see daily and the platforms innovate.

We even evaluate the laws and regulations we live under today and project how they might be interpreted 10 years from now – we call this “reinterpretation risk.” Jamie Dimon, April 2020

The Financial Times recently published an in-depth piece[5] entitled “Why are targeted ads so terrible?” This is a frequent question nowadays (just this morning one of our kids was complaining of health insurance adverts on her Playstation’s Spotify playlist! ☺) but it was a comment in the online Comments section of that same FT article from a “professional social media buyer” that we found most revealing.

The comment in Fig.3 references the extent of the pervasiveness of FB in all our online activities across all websites – not just FB’s. This pervasiveness is not well appreciated by lay people. The revelation might be shocking and seem unethical to some but, frankly, it also is an extremely valuable data asset to those wishing to either get our attention or sell us something.

It reveals the vast pervasiveness of FB into the internet and challenges facing regulators in trying to reduce these companies’ dominance of data.

Fig.3: a Facebook pixel in every website…

Source: Financial Times

If there is a risk to our investment thesis of FB we think it lies here – in the hidden data. Is it more of a driver of profits than we can see? Regulators we think may change this cross use of data but our observations on Groups we provide a powerful potential alternative data source – given completely voluntarily. As per Jamie Dimon’s comments above, Zuckerberg et al saw this coming.

Global Digital Town Square – where else are you going to go?

Zuckerberg himself has referred to FB as the “digital equivalent of a Town Square”[6] and we think it an apt metaphor. Others have likened it to a giant stadium[7] (“where the entire world comes to watch events and interact with each other. The stadium itself is a great asset. It has the largest capacity (in this case over 2 billion) and it holds the concerts and sporting events that everyone wants to watch. The stadium is a very durable asset that doesn’t take much to maintain in the short-run. But Facebook’s job is to ensure that people continue to come back to future events.”).

Whilst your typical FB user might only enjoy a network (or in the Facebook lingo ‘Group’) of say 150 people, the fact that the overall platform has c2.8bn users means a) you will surely find your best and optimum network amongst the masses 2) the data gleaned by FB at such scale ought to be more accurate and 3) the advertisers cannot ignore such a mass of attention-seeking bodies.

Whether you are a gardening group or a civil rights group – Facebook is probably your best bet in finding your tribe or your news. Similarly, if you are an ad man seeking 40-something stockbrokers’ wives in southern Ireland to advertise Fiat 500s to, Facebook is your best bet to find them.

FB monetisation of its platform is all about reach and allowing advertisers to reach specific categories of prospective buyers. All four core platforms (Facebook, WhatsApp, Instagram and Messenger) are among the highest volume platforms globally as shown in Fig.4 (LHS). The growth of Instagram (an acquired asset) within the Facebook group (RHS) is truly parabolic.

Fig.4: A very large digital town square. Platforms (LHS) and Instagram (RHS)

Online Platform Time = YouTube + Instagram Gaining Most % Internet Users Using Select Platforms > Ix per Day, Global* c-rl 31% 25% 23% 22% 13 4% 3% 1% 30% 25% 23% 19% 15% 5% 4% 2% Facebook YouTLIbe WhatsApp WeChat Instagram Facebook Messenger Snapchat Pinterest Twitch Q3M7 04<7 03:18 BOND Internet Trends Image Sharing Instagram Monthly Active Users, Global 1.0B O 0.5B 2010 2014 2018

Source: Mary Meeker, BOND internet trends

We did speak to some ad industry experts as part of our research. Most that we spoke to thought that Facebook was an opaque ‘black box’ in terms of actual reach and user insight. “You are right to question purported ROIs”, we were repeatedly told with conviction. Advertisers and their agents believe that digital ad ROIs are very hard to verify and that brands were wary of being tarnished by inflammatory social media comments adjacent to their brand imagery. The conventional wisdom aligns with the FT article mentioned above – targeted ads are not as effective as they seem. But on reflection, perhaps had we spoken to a similar ad person in 1995, they might have been just as critical of the effectiveness of a TV ad on ITV! The point is, there is huge nuance in this field – at the end of the day, most choose to trust $ earned more than anecdotes.

Yet – and this is the crucial point – all those we spoke to also said, “Where else are you going to go?

If you are an SME business with a small budget and clear demographic of target customers, Facebook probably represents your best and perhaps cheapest option for reaching that marketplace. Similarly for global brands – if one billion users (of a high earning and spending age) are on Instagram – do you have any choice but to have an advertising presence there too?

small businesses are very reliant on personalized ads, the ability to use data in a very privacy safe way, to get the customers who are interested in their products and services. And that makes sense. Big businesses, we can buy an ad to the whole country. We can buy an ad to a whole region. Small businesses can’t. They have to find the precise audiences they want. And I think, one of the mainstays of our business is we’ve enabled that targeting in a very privacy safe way, without giving information without permission to advertiser Sheryl Sandberg Q4 20

Here is some of the latest stats from FB’s Q420 update reminding us of the magnitude of this business globally. The update on Facebook Shops is particularly impressive indicator of momentum into e-commerce.

  • 2.6bn users use at least one of FB platforms daily.
  • 200m (mostly small businesses) advertisers
  • 600m members of Facebook Groups
  • 175m people message daily on WhatsApp (out of more than 1bn WhatsApp users!)
  • 1m active Facebook Shops (only launched in mid-2020!)
  • 250m Monthly active Shop users!
Innovating the Sam Walton way

Taking our analysis up to a higher level again we reflect that these growth metrics were not achieved by accident. That there is much fast growing innovation occurring in the social media space outside of FB is self-evident. The speed of growth and success of Tik Tok has lead more than a few investors to assume that Facebook’s dominance may be challenged by competitors innovating faster than it is. We see things differently. Sam Walton c.30 years ago was famously found lying down in the aisle of one of his competitors stores to measure its width. Walton, like Ryanair and others, was an excellent copier of others ideas. Whilst we do see internal innovation inside FB, crucially we also see a culture of being prepared to clone others ideas from the industry and of course act as an aggregator. This being the role it performed when purchasing WhatsApp and Instagram.

Non-US ARPU/Subs catch-up

The disparity between regional ARPU’s really caught our attention when we first looked at Facebook. In the US, Facebook generates over $150 per user compared to $50 in Europe and just c.$5 (not a typo) in the rest of the world. Now, one might argue that ARPU is a dodgy metric considering that in this case, the user does not actually contribute any revenue (remember the distinction between the user and the true customer – the advertiser).

But the disparity reflects the gap of media spending between the US and the rest of the world (ex-China) which is currently very large. But the corollary is that it also seems logical to us that as GDP (and thus Marketing and Advertising spending) rises across the developing world, it would be rational to assume this would benefit Facebook’s group ARPU in due course.

Fig.5: Facebook ARPU disparity by region

— us & Canada $200 $150 $100 $50 $0 2015 — Europe 2016 Asia Pacific 2017 Rest of World 2018 2019 Worldwide 2020  Source: SeekingAlpha, Facebook

The same distinction can also be made in its subscriber growth. The Facebook platforms stalled subs growth (saturation) in the US is often noted. The consistency and scale of subscriber growth in all other regions (ex US) however in more notable to us.

Thus, we find in FB a company where the investor experience (US 40-somethings and teenage offspring) might see stagnation in user growth and ARPU locally. However, a very different picture of still strong growth in users and spend outside the US looks set for many years into the future.

The pivot to e-commerce

Michael Wolf, Viacom (2005) “Why don’t you sell to us?” (The offer was $1.5bn)

Zuckerberg “I don’t really need any money and anyway, I don’t think I’m ever going to have an idea this good again”

Zuckerberg famously said he never thought he’d ever have a better idea than Facebook and he has shown an incredible astuteness in nurturing that idea over the last decade. Crucially Zuckerberg like many of the best managers has showed that he is not afraid to pivot, clone ideas, or block competition. In short Zuckerberg has displayed all the ruthlessness and business savvy of other great tech owner managers like Gates or Bezos. By the way, one of Zuckerberg’s early mentors was Buffett’s mate Don Graham of the Washington Post.

“Simply put: we don’t build services to make money; we make money to build better services.”[8] – Zuckerberg’s 2012 pre-IPO letter

For example, Facebook was originally a PC-native platform – the business was formed before smartphones became ubiquitous. This was a major problem in 2012 when Facebook IPO’d – investors were extremely sceptical that the young Zuckerberg would be able to sustain the business through the inevitable and necessary migration onto phone platforms. But this he did with impressive speed – what Wharton magazine called ‘the most epic tech pivot of the decade”. The transition can be clearly seen in 2012 below in Fig.6.

Fig.6: The pivot to mobile advertising was incredibly successful

HurtFacebook1 Source: Business Insider

Neither, at the time, was it obvious that Zuckerberg’s $1bn acquisition of Instagram (in 2012) or $19bn acquisition of WhatsApp (in 2014) made commercial sense. Of course in hindsight, they now look inspired. Instagram allowed a pivot to a younger generation of users and is now the jewel in the Facebook Inc. crown. WhatsApp allowed the extension of the user base to include messaging and notably is today only beginning to be monetised properly.

“Instagram and Facebook are the storefront, WhatsApp is the cash register.” – WhatsApp Chief Operating Officer, Matt Idema

We think another pivot is underway at FB – the pivot to e-commerce. In many respects FB has been on this pivot for a little while. In January 2020, Zuckerberg said that the three areas he was “most focussed on for the next chapter of our company” were private messaging, virtual reality and payments.

That is, shifting from the public Town Square (open conversations) to also being the defecto platform for (private) messaging and ultimately e-commerce via messaging. Zuckerberg alluded to this in a letter he published in 2019[9].

Fig,7: Instagram evolution from picture sharing to commerce

Instagram Image Sharing Enhancement Evolution Image Editing I Sharing Data-Driven Image + Video Stories Commerce  Source: Mary Meeker, BOND internet trends

The following excerpt (from the aforementioned newsletter) we thought insightful – credit again to Notboring). The insight here into customer-driven innovation is fascinating and is more common in smaller start-ups. That the innovation originated in Asia is also fascinating given our comments earlier on the prospect for higher Asian ARPUs.

Increasingly, Facebook is backward integrating from simply being an advertising platform into building the tools to facilitate customer communication and commerce in-app. Just like Tencent built tools for businesses in WeChat after seeing businesses communicating with customers in the app, Facebook saw businesses in Thailand use profiles on WhatsApp, Facebook, and Messenger as their homepages and leaned in by adding features. They built catalogs, then a Marketplace Tab, then power tools. Now, Facebook powers roughly 1% of Thailand’s GDP (~$5 billion in GMV), and Facebook is rolling out the tools that it built there in the US and around the globe. Over the past year, Facebook has undertaken two related projects to unify the Family of products and help businesses sell through them: Messaging Interoperability and Shops. – ‘Notboring’ newsletter, Nov 2020

With these innovations in mind we return again to the other end of our sofas and the real users of Facebook and Instagram that we wake up with each day. The innovations that have taken place on Instagram are to them, broadly speaking: gradual, iterative and largely welcome. Again ads are typically seen as targeted, relevant and enjoyable. This is a very different perspective from that which some negative investors might offer.

Facebook shops: entertainment + shopping

We had not heard of Sea Ltd and its Shoppe platform until a few months ago and it is a revelation in how quickly shopping habits are changing in parts of the world. Part Tik Tok, part gaming app and part eBay, the Shoppe app is gaining huge traction in South East Asia and Brazil where is attracts younger consumers drawn to entertainment assets (Sea’s ‘Garena’ gaming business had the most popular gaming app globally for the last two years). The Shoppe app matches these wily consumers with local brands who list their store inventory alongside games. Shopping has truly become entertainment. For a useful background on Sea Ltd we suggest a read of the following[10].

We think FB is watching – closely. It is employing similar tactics in trialling new innovative e-commerce opportunities. We mentioned the momentum in Shops earlier and Fig.7 showed the already available ecommerce attributes of the Instagram sites.

The following press releases give an indication of the innovation momentum through last year at FB including the aforementioned Shops but also a much-anticipated launch of Digital Wallet (called Novi).

Introducing Facebook Shops: Helping Small Businesses Sell Online

May 19, 2020

Facebook has always been about connecting you to what you love. That means friends and family, but also products, brands and businesses. For years, people have used our apps to buy and sell things from the early days of posting a photo of a bicycle with the caption “for sale,” to selling your coffee table on Marketplace and now shopping styles from your favorite brands and influencers on Instagram. It was the people who use our apps who envisioned social commerce. We’re helping them make it a reality.

Making It Easier to Shop and Sell on Our Apps

We’re creating new ways for people to shop on our apps and providing tools to help businesses sell online.

August 25, 2020

Update on December 1, 2020 at 6:05AM PT:

Libra changed its name to Diem.

Originally published on May 26, 2020 at 7:00AM PT:

A New Digital Wallet for Libra

Today, we’re excited to introduce Novi — the new name and brand for the digital wallet that will help people send and hold Libra digital currencies. While we’ve changed our name from Calibra, we haven’t changed our long-term commitment to helping people around the world access affordable financial services. Whether you’re sending money home to support the family members who supported you, or you’re receiving money from your friends no matter where they are, the Novi wallet will make money work better for everyone. Source: Facebook Press Releases[11] [12]

The bear arguments & Valuation

The bear arguments go as follows:

  • Toll operators (notably, Apple) will demand a share of profits (aka a Toll) or structurally impede growth (again: Apple’s IDFA – ‘identfier for advertisers’)
  • Regulators will hamper business growth, or force limitation or break-ups
  • Users will defect to ‘the next big thing’ platform
  • Advertisers will defect (citing low or falling ROI) to Amazon/Twitter/Snap/Pinterest/ Bytedance et al

We might also add

  • The capital cycle could mean that Facebook’s margins might get eroded due to competition.

As we have tried to express above, we think these risks are real but are likely out-weighed, in the long run, by the entrenched position that the Facebook’s (four – not one) platforms enjoy and the growth prospects. This is FB’s market to lose and we think there is little sign of ‘fade’. Given Zuckerberg’s track record we are not inclined to bet against him. We see his combined innovation, cloning and blocking skill set as underrated. Each of the above risks could have a further 10 pages dedicated to them and the brevity of this section is not meant to downplay them. Rather we have deliberately tried to focus on what the market is not thinking about today – the big picture opportunity.


Bob Metcalfe famously formulated Metcalfe’s law which astutely showed that the value of a network derived from (the square of) number of users using it. NB – this is a power law, a non-linear just like compound interest!

Metcalfe’s law states that the value or utility of a network is proportional to the square of the number of user’s of the network (n2).

On that basis, FB’s network assets (i.e. its platforms) must have the potential to be the most valuable in the world.

It was certainly easier writing the Apple valuation section in January 2019 but this is a different beast than Apple. We wonder whether Apple’s IDFA launch in the coming weeks might cause a large enough bump in the road to offer a more sober P/E entry level for new FB investors.

Conclusion – The world’s best FREE utility

What attracted us to Facebook in the last few months was that we found ourselves more and more seeing the other side of the negative investor sentiment & perceived regulatory threats being presented against it.

When regulators argue over how FB should be controlled and regulated more, they cite legislation such as Section 230. This law was established 25 years ago to exempt so-called digital ‘town squares’ from liability resulting from the views that are expressed within them. The more we listened to regulators fight over this issue, the more they inadvertently endorsed our thesis! FB is the defacto Town Square utility of this era, a monopoly that will be super hard to replace even if you managed to build a new out-of-town square (because folks will likely keep going to the old one!) This was, in effect, Bob Metcalf’s legendary insight too.

Another way we think investors can view FB as an entity (ie including Instagram etc) is as a newspaper. But one that is not wedded to a certain form of content which it refuses to change over time. Instead, as it sees its customers tastes change and competitors innovate, then the format of its offering does too. Why do we use the newspaper comparison? Because of the regularity with which the sites are looked-at (daily) and that the platform provides FB users with in-effect personally curated news. Crucially however, this newspaper as well as being enjoyed by many billions globally and innovating to suit changing tastes, is also free to its readers. Our curated news point was highlighted in the recent Australia/FB spat, when during exchanges FB admitted that only a minority (c.15%) of the content viewed on its websites was content produced by new outlets.

This we think is telling. Arguably FB have created a new daily habit for many billions of people and the content that supports it is largely internal (or at least collected by FB and provided for free by its users). Other business models of the past show us that if there is no incentive to switch away from such a service, unless you are offered a better product/service or a cheaper price. Otherwise, consumers do not leave.

As such it is a combination of traits that underpins the lasting utility idea of FB. That the cost to the user is zero, that the experience is enjoyed, that the company innovates (Groups/e-commerce) and also clones other’s ideas when they think it right to do so.

This utility structure (and customers’ enjoyment of it) gives us more confidence that the current assets of FB (and their attractiveness to advertisers) will be largely unchanged by regulation or privacy changes. It also suggests to us that future growth will fade less quickly than others fear and that more innovation may yet still come along as free options on growth

Paying 22x earnings for what looked like 20% multi-year earnings growth looked very attractive to us initially. At 27x, we now accept a little more is priced-in, but our reflections on the fundamentals remain the same.

We are Facebook Inc fans.

With kind regards

Andrew Hollingworth & Mark Power

The Directors and employees of Holland Advisors may have a beneficial interest in some of the companies mentioned in this report via holdings in a fund that they also act as managers to.


This document does not consist of investment research as it has not been prepared in accordance with UK legal requirements designed to promote the independence of investment research. Therefore even if it contains a research recommendation it should be treated as a marketing communication and as such will be fair, clear and not misleading in line with Financial Conduct Authority rules. Holland Advisors is authorised and regulated by the Financial Conduct Authority. This presentation is intended for institutional investors and high net worth experienced investors who understand the risks involved with the investment being promoted within this document. This communication should not be distributed to anyone other than the intended recipients and should not be relied upon by retail clients (as defined by Financial Conduct Authority). This communication is being supplied to you solely for your information and may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose. This communication is provided for information purposes only and should not be regarded as an offer or solicitation to buy or sell any security or other financial instrument. Any opinions cited in this communication are subject to change without notice. This communication is not a personal recommendation to you. Holland Advisors takes all reasonable care to ensure that the information is accurate and complete; however no warranty, representation, or undertaking is given that it is free from inaccuracies or omissions. This communication is based on and contains current public information, data, opinions, estimates and projections obtained from sources we believe to be reliable. Past performance is not necessarily a guide to future performance. The content of this communication may have been disclosed to the issuer(s) prior to dissemination in order to verify its factual accuracy. Investments in general involve some degree of risk therefore Prospective Investors should be aware that the value of any investment may rise and fall and you may get back less than you invested. Value and income may be adversely affected by exchange rates, interest rates and other factors. The investment discussed in this communication may not be eligible for sale in some states or countries and may not be suitable for all investors. If you are unsure about the suitability of this investment given your financial objectives, resources and risk appetite, please contact your financial advisor before taking any further action. This document is for informational purposes only and should not be regarded as an offer or solicitation to buy the securities or other instruments mentioned in it. Holland Advisors and/or its officers, directors and employees may have or take positions in securities or derivatives mentioned in this document (or in any related investment) and may from time to time dispose of any such securities (or instrument). Holland Advisors manage conflicts of interest in regard to this communication internally via their compliance procedures.

  1. Recently Reasonable, now a little less so!
  2. This was the PE when we started our work – today it is closer to 27x. As ever, we just can’t write fast enough!
  3. The Facebook Effect, David Kirkpatrick; The Age of Surveillance Capitalism, Shoshana Zuboff,; Chaos Monkeys, Antonio Garcia Martinez & Subprime Attention, Tim Hwang
  4. Source: eMarketer
  5. If Big Data has our data, why are targeted ads so terrible?, Financial Times, March 17 2021
  6. https://www.facebook.com/notes/mark-zuckerberg/a-privacy-focused-vision-for-social-networking/10156700570096634/
  7. https://sabercapitalmgt.com/facebook-is-undervalued/
  8. Zuckerberg IPO S-1, Feb 12, https://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm
  9. https://www.facebook.com/notes/mark-zuckerberg/a-privacy-focused-vision-for-social-networking/10156700570096634/
  10. https://www.reuters.com/article/us-sea-southeast-asia-tech-focus-idUSKBN2BF0I2
  11. https://about.fb.com/news/2020/05/introducing-facebook-shops
  12. https://about.fb.com/news/2020/05/welcome-to-novi

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The content of this website has been prepared by Holland Advisors (London) Ltd on the basis of information and sources believed to be reliable.

Under no circumstances should any part of this website be construed as an offering or solicitation of an offer for any investment in the products on this site Holland Advisors (London) Limited is authorised and regulated by the Financial Conduct Authority (FRN 538932).

1. Not for U.S. Persons
The provision of the information in this web site does not constitute an offer of securities to any person in the United States or to any U.S. Person as such term is defined under the Securities Act of 1933, as amended. The information contained in this site about Holland Advisors (London) Ltd is not directed to any person in the United States. Funds referred to herein are neither registered under the Securities Act 1933 of the USA, nor are they registered under the Investment Company Act of 1940. Consequently, they cannot be offered for sale or be sold in the USA, its territories, possessions or protectorates under its jurisdiction, nor to nationals, citizens or residents in any of those areas.

No investments or services mentioned on this website are directed at US Persons who are not Eligible Counterparties as defined by the UK Financial Conduct Authority (FCA) Handbook or Qualified Purchasers as defined under the Investment Company Act of 1940. The information contained herein does not constitute a distribution, an offer to sell or the solicitation of an offer to buy any securities in any jurisdiction in which such distribution or offer is not authorised.

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3. Information on the Website
Except where stated otherwise, the information, content and services on this Website (the “Information”) are provided by Holland Advisors (London) Ltd (referred to as “we” and “us”) as at the date indicated on the relevant material.

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You may not use any part of the material or Information on this Website to establish, maintain or provide or assist in establishing, maintaining or providing a stock market for trading in securities.

6. Investment Performance and Accuracy of Information
The Site contains material about the past performance of our Funds. The value of an investment in a Fund may go up as well down so that an investor’s investment in a Fund, when redeemed, may be more or less than the original investment amount. By its nature, investment in a Fund managed by Holland Advisors (London) Ltd is only suitable for sophisticated investors who do not require immediate liquidity for their investment, for whom an investment in a Fund does not constitute a complete investment programme and who fully understand and are willing to assume the high risk involved in the investment programme of a Fund. THE PAST PERFORMANCE OF ANY INVESTMENT, INVESTMENT STRATEGY OR INVESTMENT STYLE IS NOT INDICATIVE OF FUTURE PERFORMANCE.

Whilst the information contained on the Website has been given in good faith and every effort has been made to ensure its accuracy, the Information may not be complete or accurate for your purposes. This Website and the Information is provided on an “as is” basis and Holland Advisors (London) Ltd may not, and has no obligation to, update the Information or correct any inaccuracy which subsequently becomes apparent. The Information and/or opinions and estimates comprised in the Information may be changed or withdrawn without notice and may become outdated. You, therefore, should verify any information or other material obtained from this Website before you use it.



The Information is assembled from material prepared by Holland Advisors (London Ltd) or its agents but may not include Information made known to Holland Advisors (London) Ltd officers (or agents) subsequent to the date of publication of the Information indicated on the Website. If you use the Information, you do so at your own risk. Please recognise that the previous performance of securities or other instruments does not guarantee or predict future performance.

7. Exclusion of liability



8. Third Party Websites
We may provide, on our Website, links to websites operated by third parties as a convenience to you. If you use these other sites, you will leave this Website. If you decide to visit any linked site, you do so at your own risk and it is your responsibility to take all protective measures to guard against viruses or other destructive elements.

Holland Advisors (London) Ltd makes no representations, warranties or guarantees of any kind about any of the content of any other website which you may access by hypertext link through this Website. When you access any other website by means of a link from this Website, you should understand that your access to that other website is independent of Holland Advisors (London) Ltd and Holland Advisors (London) Ltd has no control over the content of the website, nor does Holland Advisors (London) Ltd in any way endorse or approve the content of that website. In no event will Holland Advisors (London) Ltd in any way be liable to you or any other person(s) or organisation(s) for loss or damage (whether direct, indirect, consequential, special or other) for any use of any site linked to it by means of hypertext or otherwise.

9. Indemnity
You agree to indemnify Holland Advisors (London) Ltd and its officers from and against any claim brought by third parties against Holland Advisors (London) Ltd and its officers as a consequence of your breach of the Terms of Use. Furthermore, if your use of this Website results in the need for servicing, repair or correction of equipment, software or data, you assume all costs thereof.

10. Intellectual Property Rights and Licence
The copyright, trade mark or any other intellectual property rights in the Website and the Information are owned by or licensed to Holland Advisors (London) Ltd. You may download or print out a hard copy of individual pages and/or sections of this Website provided you do not remove any copyright or other proprietary notices. Any downloading or other copying from this Website will not transfer title to any software or material to you. You may not reproduce (in whole or in part), transmit (by electronic means or otherwise), modify, link to or use for any public or commercial purpose this Website without the prior written permission of Holland Advisors (London) Ltd. Any rights not expressly granted in the Terms of Use are reserved.

11. Operation of the Website
You should be aware that the internet, being an open network, is not secure. If you choose to send any electronic communications by means of this Website, you do so at your own risk. Holland Advisors (London) Ltd cannot guarantee that such communications will not be intercepted or changed or that they will reach the intended recipient safely.

12. Privacy
Any personal data relating to you will be collected, used and recorded by us in accordance with current data protection legislation, the Terms of Use and our Privacy Policy. You must read our Privacy Policy as it forms part of the Terms of Use.

13. Governing law
The Terms of Use are governed by the laws of England and Wales and the courts of England and Wales will have exclusive jurisdiction over any disputes arising under them.

14. Waiver
If you breach the Terms of Use and we take no action, we will still be entitled to use our rights and remedies in any other situation where you breach the Terms of Use.

15. Our details
This website is owned and operated by Holland Advisors London Ltd. You can contact us at: Holland Advisors London Ltd, The Granary, 1 Waverley Lane, Farnham, Surrey, GU9 8BB.

Updated and effective as of  31st March 2021


Please read the following conditions of use of this website.
This website is directed at high net worth experienced investors and institutional investors who understand the risks involved with the investments being promoted and it should not be relied upon by retail clients (as defined by Financial Conduct Authority).

The information on this website is issued by Holland Advisors (London) Limited (hereafter referred to as “Holland Advisors”), a limited liability company (7431314) incorporated in England and Wales, which is authorised and regulated by the Financial Conduct Authority (FRN: 538932).

This website is for information purposes only and does not constitute an offer or solicitation to buy or sell securities, funds or any other financial instrument. The information is directed inside the United Kingdom and is not directed at any persons in jurisdictions where it would be against local law or regulation.  In particular, information on this site is not directed at any person, partnership or corporation being resident in the United States of America. Holland Advisors disclaims all responsibility if you access or download any information in breach of any law or regulation of the country in which you reside.

Information on this site
The information provided does not constitute advice. Holland Advisors believes that the sources of the information in this website are reliable. However it cannot and does not guarantee, either expressly or implicitly, and accepts no liability for, the accuracy, validity, timeliness or completeness of any information or data (whether prepared by it or by any third party) for any particular purpose or use or that the information or data will be free from error. Holland Advisors does not undertake any responsibility for any reliance which is placed by any person on any statements or opinions which are expressed herein. Neither Holland Advisors nor any of its directors, officers or employees will be liable or have any responsibility of any kind for any loss or damage that any person may incur resulting from the use of this information. This does not exclude or restrict any duty of liability that Holland Advisors has to its customers under the regulatory system in the United Kingdom. All Information may be changed or amended without prior notice although Holland Advisors does not undertake to update this site regularly.

Marketing Communications
Documents on this site do not constitute investment research as they have not been prepared in accordance with UK legal requirements designed to promote the independence of investment research. Therefore, even if they contain research recommendations they should be treated as marketing communications and as such will be fair, clear and not misleading in line with Financial Conduct Authority rules. These communications are not personal recommendations to you and any opinions cited are subject to change without notice. Holland Advisors takes all reasonable care to ensure that the information on this site is accurate and complete; however no warranty, representation, or undertaking is given that it is free from inaccuracies or omissions. Documents on this site are based on, and contain, current public information, data, opinions, estimates and projections obtained from sources we believe to be reliable. Past performance is not necessarily a guide to future performance. The content of these documents may have been disclosed to the issuer(s) prior to dissemination in order to verify their factual accuracy.

Investments in general involve some degree of risk, therefore Prospective Investors should be aware that the value of any investment may rise and fall and you may get back less than you invested. Value and income may be adversely affected by exchange rates, interest rates and other factors. The investments discussed on this website may not be eligible for sale in some states or countries and may not be suitable for all investors. If you are unsure about the suitability of an investment given your financial objectives, resources and risk appetite, please contact your financial advisor before taking any further action.

Holland Advisors and/or its officers, directors and employees may have or take positions in securities, funds or derivatives mentioned on this site (or in any related investment) and may from time to time dispose of any such securities (or instrument). Holland Advisors manages these potential conflicts of interest internally via its compliance procedures.

Fund Information
Parts of this site may refer to Funds managed or advised by Holland Advisors. These are not solicitations to invest and any potential investors should refer to the “Our Funds” section of the website in order to learn more about these Funds and find out how and where to obtain the relevant full legal documentation.

Linked Websites
This site may be linked to third party websites or contain information provided by third parties. Holland Advisors does not make any representation as to the accuracy or completeness of such websites or information, has not and will not review or update such websites or information, and cautions browsers that any use made of such websites or information is at their own risk. Holland Advisors does not accept any liability arising out of the information contained on any linked website or Information provided by a third party and the use of such sites and information is at your own risk. This does not exclude or restrict any duty or liability that Holland Advisors has to its customers under the regulatory system in the United Kingdom.

You agree to indemnify and defend Holland Advisors, its affiliates and licensors, and the officers, directors, employees, and agents of Holland Advisors and its affiliates and licensors, from and against any and all claims, liabilities, damages, losses, or expenses, including legal fees and costs, arising out of or in any way connected with your access to or use of this website and the Information.

Use of Cookies
If you agree to these terms and conditions a “cookie” might be placed on your computer. A cookie is a packet of information that does not identify individual users of a website, but allows the collection of website activity (such as the number of users who visit our website, the date and time of visits, the number of pages viewed, navigation patterns, what country and what systems users have used to access the site). We can use this information for statistical purposes, which allows us to analyse and improve our website. The cookie will expire automatically after 6 months or you can manually remove cookies in your browser settings.

Copyright, Trademarks and Other Rights
Copyright, trademarks, database rights, patents and all similar rights in this site and the information contained in it are owned by Holland Advisors or relevant third party providers. You may use the Information and reproduce it in hard copy for your personal reference only. The information contained herein and any supplemental documentation provided is confidential and should not be copied, reproduced or redistributed without the prior consent of Holland Advisors.

Governing Law
You agree that your use of this site and any dispute arising from this use is subject to English law and you submit to the jurisdiction of the Courts of England & Wales.

Privacy Notice

This is the privacy notice of Holland Advisors London Ltd our company number is 07431314. Our registered office is at 7 York Road, Woking, Surrey, GU22 7XH.



This notice describes how we collect, store, transfer and use personal data. It tells you about your privacy rights and how the law protects you.

In the context of the law and this notice, ‘personal data’ is information that clearly identifies you as an individual or which could be used to identify you if combined with other information. Acting in any way on personal data is referred to as ‘processing’.

This notice applies to personal data collected through our website www.hollandadvisors.co.uk.

Except as set out below, we do not share, or sell, or disclose to a third party, any information collected through our website.


Data Protection Officer

We have appointed a data protection officer (‘DPO’) who is responsible for ensuring that our privacy policy is followed. If you have any questions about how we process your personal data, including any requests to exercise your legal rights, please contact our DPO, Claire Brunt at  claire@hollandadvisors.co.uk.


Personal data we process

1. How we obtain personal data

The information we process about you includes information:

  • you have directly provided to us
  • that we gather from third party databases and service providers
  • as a result of monitoring how you use our website or our services

2. Types of personal data we collect directly

When you use our website, you may provide personal data by submission of data by our Sign Up or Contact Us forms. This can be categorised into the following groups:

  • personal identifiers, such as your first and last names
  • contact information, such as your email address and your telephone number for communication
  • records of communication between us including messages sent through our website, email messages and telephone conversations
  • marketing preferences that tell us what types of marketing you would like to receive

3. Types of personal data we collect from your use of our services

By using our website and our services, we process:

  • technical information about the hardware and the software you use to access our website and use our services, including your Internet Protocol (IP) address, your browser type and version and your device’s operating system
  • usage information, including the frequency you use our services, the pages of our website that you visit, whether you receive messages from us and whether you reply to those messages
  • your preferences to receive marketing from us; how you wish to communicate with us; and responses and actions in relation to your use of our services.

4. Our use of aggregated information

We may aggregate anonymous information such as statistical or demographic data for any purpose. Anonymous information is that which does not identify you as an individual. Aggregated information may be derived from your personal data but is not considered as such in law because it does not reveal your identity.

For example, we may aggregate usage information to assess whether a feature of our website is useful.

However, if we combine or connect aggregated information with your personal data so that it can identify you in any way, we treat the combined information as personal data, and it will be used in accordance with this privacy notice.

5. The bases on which we process information about you

The law requires us to determine under which of six defined bases we process different categories of your personal data, and to notify you of the basis for each category.

If a basis on which we process your personal data is no longer relevant then we shall immediately stop processing your data.

If the basis changes then if required by law we shall notify you of the change and of any new basis under which we have determined that we can continue to process your information.

6. Information we process with your consent

Through certain actions when there is no contractual relationship between us, such as when you browse our website or ask us to provide you more information about our business, you provide your consent to us to process information that may be personal data.

Wherever possible, we aim to obtain your explicit consent to process this information, for example, we ask you to agree to our use of non-essential cookies when you access our website.

We continue to process your information on this basis until you withdraw your consent or it can be reasonably assumed that your consent no longer exists.

You may withdraw your consent at any time by instructing us  claire@hollandadvisors.co.uk.

7. Information we process for the purposes of legitimate interests

We may process information on the basis there is a legitimate interest, either to you or to us, of doing so.

Where we process your information on this basis, we do after having given careful consideration to:

  • whether the same objective could be achieved through other means
  • whether processing (or not processing) might cause you harm
  • whether you would expect us to process your data, and whether you would, in the round, consider it reasonable to do so

For example, we may process your data on this basis for the purposes of:

  • improving our services
  • record-keeping for the proper and necessary administration of our business
  • responding to unsolicited communication from you to which we believe you would expect a response
  • preventing fraudulent use of our services
  • exercising our legal rights, including to detect and prevent fraud and to protect our intellectual property
  • insuring against or obtaining professional advice that is required to manage business risk
  • protecting your interests where we believe we have a duty to do so


How and when we process your personal data

8. Your personal data is not shared

We do not share or disclose to a third party, any information collected through our website.


Use of information we collect through automated systems

9. Cookies

Cookies are small text files that are placed on your computer’s hard drive by your web browser when you visit a website that uses them. They allow information gathered on one web page to be stored until it is needed for use at a later date.

They are commonly used to provide you with a personalised experience while you browse a website, for example, allowing your preferences to be remembered.

They can also provide core functionality such as security, network management, and accessibility; record how you interact with the website so that the owner can understand how to improve the experience of other visitors.

Some cookies may last for a defined period of time, such as one visit (known as a session), one day or until you close your browser. Others last indefinitely until you delete them.

Your web browser should allow you to delete any cookie you choose. It should also allow you to prevent or limit their use. Your web browser may support a plug-in or add-on that helps you manage which cookies you wish to allow to operate.

The law requires you to give explicit consent for use of any cookies that are not strictly necessary for the operation of a website.

10. Personal identifiers from your browsing activity

Requests by your web browser to our servers for web pages and other content on our website are recorded.

We record information such as your geographical location, your Internet service provider and your IP address. We also record information about the software you are using to browse our website, such as the type of computer or device and the screen resolution.

We use this information in aggregate to assess the popularity of the webpages on our website and how we perform in providing content to you.


Other matters

11. Your rights

The law requires us to tell you about your rights and our obligations to you in regard to the processing and control of your personal data.

We do this now, by requesting that you read the information provided at  http://www.knowyourprivacyrights.org

12. Communicating with us

When you contact us, whether by telephone, through our website or by email, we collect the data you have given to us in order to reply with the information you need.

We record your request and our reply in order to increase the efficiency of our business. We may keep personally identifiable information associated with your message, such as your name and email address so as to be able to track our communications with you to provide a high quality service.

13. Complaining

If you are not happy with our privacy policy, or if you have any complaint, then you should tell us.

When we receive a complaint, we record the information you have given to us on the basis of consent. We use that information to resolve your complaint.

14. Retention period

Except as otherwise mentioned in this privacy notice, we keep your personal data only for as long as required by us to provide you with the services you have requested.

15. Compliance with the law

Our privacy policy complies with the law in the United Kingdom, specifically with the Data Protection Act 2018 (the ‘Act’) accordingly incorporating the EU General Data Protection Regulation (‘GDPR’) and the Privacy and Electronic Communications Regulations (‘PECR’).

16. Review of this privacy policy

We shall update this privacy notice from time to time as necessary.