by David Stockman, David Stockman’s Contra Corner:
…….Indeed, the so-called social media stocks represent the very essence of the bicoastal Bubble Finance prosperity of Wall Street and Silicon Valley.
The truth is, Facebook——along with Instagram, Whatsapp, Oculus VR and the 45 other testaments to social media drivel that Mark Zuckerberg has acquired with insanely inflated Wall Street play money during the last few years——-is not simply a sinkhole of lost productivity and low-grade self-indulgent entertainment. It is also a colossal valuation hoax, and one that is heading for another “Faceplant” when the third great financial bubble of this century comes crashing down.
Why? Because at bottom, Facebook (FB ) is just an Internet billboard. It’s a place where the idle mostly idle their time, like millennials in or out of their parents’ basement. Whether they grow tired of Facebook or not remains to be seen, but one thing is certain.
To wit, FB has invented nothing, has no significant patents, delivers no products and generates no customer subscriptions or service contracts. Its purported 1.8 billion “MAUs” (monthly average users) are fiercely devoted to “free stuff” in their use of social media.
Therefore, virtually all of its revenue comes from advertising. But ads are nothing like a revolutionary new product such as Apple’s iPhone, which can generate tens of billions of sales out of nowhere.
The pool of advertising dollars, by contrast, is relatively fixed at about $175 billion in the U.S. and $575 billion worldwide. And it is subject to severe cyclical fluctuations. For instance, during the Great Recession, the U.S. advertising spend declined by 15% and the worldwide spend dropped by 11%.
And therein lies the skunk in the woodpile. Due to its sharp cyclicality, the trend growth in U.S. ad spending during the last decade has been about 0.5% per annum. Likewise, the global ad spend increased from about $490 billion in 2008 to $575 billion in 2015, reflecting a growth rate of 2.3% annually.
Yes, there has been a rapid migration of dollars from TV, newspapers and other traditional media to the digital space in recent years. But the big shift there is already over.
Besides that, you can’t capitalize a one-time gain in sales of this sort with even an average market multiple. And that’s saying nothing about the fact that FB’s recent $360 billion market cap represented a preposterous multiple of 225 times its $1.6 billion of March 2016 LTM free cash flow
For the June 2016 LTM period, in fact, its multiple was infinite because its free cash flow was actually negative $1.5 billion.
In any event, the digital share of the U.S. ad pool rose from 13.5% in 2008 to an estimated 32.5% last year. But even industry optimists do not expect the digital share to gain more than a point or so per year going forward. After all, television, newspapers, magazines and radio and highway billboards are not going to disappear entirely.
Consequently, there are not remotely enough advertising dollars in the world to permit the endless gaggle of social media space entrants to earn revenue and profits commensurate with their towering valuations and the sell side’s hockey stick growth projections. In social media alone, therefore, there is more than $1 trillion of bottled air.
In fact, in a milieu built around the concept of “free stuff” the massive amount of speculative VC capital that has entered the social media space is certain to drive customer acquisition and service costs ever higher and margins to the vanishing point.
The fact is, none of the social media competitors, not even Facebook, have a permanently defensible first mover advantage. That is evident in the current tally of 140 so-called venture capital “unicorns”. Each has a private pre-IPO “valuation” of $1 billion or more, or at least did until recently when the drought of IPOs has begun to puncture the fantasy. Even then, the group is still “valued” at $500 billion in the rarified precincts of Silicon Valley.
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