Facebook vs Australia

Australia recently announced a bill that would require Facebook and Google to pay news publishers for displaying news links on their sites. This would be a change to their business models as historically this content was listed for free.

I readily acknowledge the importance of journalism but this law seems an unjust way to address the issue since there is no requirement on where the payments to publishers will go. Facebook isn’t against paying for journalism (Facebook News pays hundreds of publishers) but the company is understandably strongly against forced arbitration.

But it doesn’t matter what I think.

What matters is the public hate towards Facebook is real and the Capitol Hill insurrection makes it easier than ever for politicians to go after the company.

Google initially threatened to pull out of Australia before caving and agreeing to pay publishers. However, Facebook called the Aussies’ bluff and decided to ban all news on their site. Unfortunately, the company massively botched the news ban rollout with many Australian government health department and emergency services pages getting temporarily taken down.

That’s not a great look for Facebook during the middle of a pandemic.

But the news ban worked! Today the Australian government agreed to amend the bill. Facebook once again allowed news on its site and commented “After further discussions, we are satisfied that the Australian government has agreed to a number of changes and guarantees that address our core concerns about allowing commercial deals that recognize the value our platform provides to publishers relative to the value we receive from them.

The company now has two months to come to a commercial agreement with publishers. I guarantee that Facebook will also take this time to improve any future news ban from accidentally blocking health and safety pages since blocking the news is now their trump card in any negotiation.

Ultimately, this all comes down to power.

The fact is Facebook is more important to news publishers than news publishers are to Facebook.

Facebook recently disclosed that the impact from any news ban is minimal to their user experience with news making up less than 4% of the content people see in their News Feed. In contrast, Facebook generated approximately 5.1 billion free referrals to Australian publishers worth an estimated AU$407 million. 

Sara Fischer of Axios beautifully displays the power that Facebook has over publishers.

The Facebook news ban was a warning shot to Australia and governments around the world.

Hopefully, this type of flexing will eventually push regulators to break up Facebook.

I actually believe that splitting up Facebook from Instagram and WhatsApp would greatly improve innovation at all three and send the shares dramatically higher.

Just look at how cheap the market is pricing the stock today.

Facebook shares are $260 with $22 in cash per share.

The stock is trading at 17.5x 2022 estimates (ex-cash).

17.5x? The forward multiple on the S&P is 21.9x. 25% higher!

Is Facebook really a below average business?

Isn’t this such a powerful company that in just December its own government sued it for being able to ‘crush rivals’?

Here’s another way to look at how cheap Facebook is compared to its peers.

Goldman has Instagram’s revenue for 2020 at $22.4b. If we apply Snap’s EV/Rev multiple of 35x, the value of just Instagram would be $784b or $275 per share. That’s more than the current price of the entire company and you would still have Facebook, WhatsApp and the Oculus businesses remaining.

Over the years, Facebook has seen a number of issues that analysts were convinced would destroy the business. The shift to mobile, the Cambridge Analytica scandal, countless delete Facebook campaigns, and now IDFA and the Australian news ban, yet the company continues to see stable daily engagement and record profits.

The amount of minutes per day spent by Facebook and Instagram users is relatively unchanged over the past 4 years and that includes the rise of TikTok.

The company now has 1.8 billion daily active users up from 1.5 billion two years ago.

Not even Elon Musk could kill WhatsApp, which has rebounded to its previous download rank level.

Yet, the stock trades at a 25% discount to the market’s multiple.

Disclosure: Long Facebook

This post is intended for informational purposes and should not be construed as an offering or the solicitation of an offer to purchase an interest in Tidefall Capital Management LP (the “Fund”). Past performance should not be mistaken for and should not be construed as an indicator of future performance and there is no assurance that the investment objectives of the Fund will be achieved. An investment in the Fund involves a high degree of risk. The information contained in this post is not, and should not be construed as, legal, accounting, investment or tax advice. The contents of this post are based upon sources of information believed to be reliable but no warranty or representation, expressed or implied, is given as to their accuracy or completeness. All opinions and estimates contained in this report constitute the Manager’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. The Manager asserts that the reader is solely liable for their interpretation and use of any information contained in this post.