Newsletter: Published Tuesday, 31 July 2018.


📈 Facebook's new growth strategy.

Facebook has given investors a bit of a fright.

Rather than focus unrelentingly on growing their profit margins and growing their advertising streams, they are instead going to grow less from here on out.

That’s just...not...how tech businesses are supposed to work! Growth is key!

Investors were horrified last week. The share price plummeted 19% and $US120 billion was wiped off the company’s market capitalisation.

Mark Zuckerberg - the company’s largest shareholder - was positively poor when his holding slumped to below $70 billion.

Investment analysts were somewhat disappointed in Facebook’s earnings which included over $US5.1 billion of net income for the second quarter. Which was up 31% on last year.

But the company’s expenses are what saw the market take such fright. They have blown way out; in the second quarter of this year total expenses have surged to $US7.4 billion, up 50% compared with a year ago.

As such, operating profit margins were lower and Facebook executives said they will stay lower for the next several years. Investors hated that.

But this is because Facebook - which has borne an absolute firestorm of distrust and anger and interrogation since the Cambridge Analytica scandal - has decided to spend some of its enormous balance sheet on implementing proper privacy measures.

That’s, kind of a good thing?

Facebook is changing its business in ways that reduce growth and advertising revenue, in order to make the business last longer.

If they keep pumping the advertising dollars - which they will because it’s exceptionally profitable - but maybe less though, then they might have less data breaches, be more compliant and generally be more sustainable in our evolving data-centric world.

Facebook is looking to roll out new protection measures to its users, and at a top level that doesn't seem great for its underlying business. If users choose to share less data with Facebook (or limit who Facebook can share with), that could dampen the company’s ad-targeting abilities. That would make it less attractive to marketers.

But users might begin to trust the service again, and that would be good for user growth? Which would be good for advertisers?

Look, one of the things with investing is you can build a narrative around whatever you like. Maybe Facebook has reached user saturation or people have become bored with the Facebook offering or Facebook is targeting people who want more than just a superficial "skim over the newsfeed" experience.

Anyway, this all seems like a rather positive development to us. And, when we think about investments, the sustainability of Facebook over the long-term is our primary concern.

A sharp market reaction isn't enough to frighten us out of our position. Even if that actually meant Facebook claims “the largest ever loss of value in one day for a US traded company”.

Which it did.

It managed to lose $120 billion in one day, far outstripping Intel, which lost just under $91 billion in one day in September 2000.

So, go Facebook.

🏝️ Remember the Fyre Festival?

A guy called Billy McFarland and some mates - including Ja Rule - basically sold millions of dollars worth of tickets to a luxury music festival in the Bahamas but forgot to do any organising of the festival.

And when people arrived in their private jets they were stuck on a rocky outcrop in disaster relief tents, many without food or water, with absolutely nowhere to do Insta properly, nor any of the promised music.

It was just, a great story. Because people paid so much money to camp on a gravelly island. And because Ja Rule was one of the promoters. And because of outraged thinkpieces. And because ultimately Billy McFarland pled guilty to wire fraud.

And because the SEC last week found his business partner did a rather incredible job of falsifying the accounts of their entire fake business.

Like, it was pretty amazing the lengths to which this guy made a fake business. The spreadsheets containing fake revenue streams, and fake loan repayments, and fake interest repayments, and fake repeat buyers all looked so carefully constructed.

Anyway, it’s probably a lot less work than actually having to go out there and build a business.

But still, it looked like a lot of work.

McFarland now owes various defrauded parties $US27.4 million.