11 Reasons To Bet Against Facebook’s Stock With Put Options

Written by Dana Sanchez
1 of 11

Andrew Left, founder of Los Angeles-based Citron Research, has long targeted firms that he thinks are overvalued or engaged in fraud. In October 2015, Left correctly called the decline in Valeant Pharmaceuticals, and his firm is one of the few short-selling research shops that consistently moves markets on newly released reports, CNBC reported in June, 2016. That same month, Left told Bloomberg that Facebook Inc. could lose a third of its market value or more and he was betting against the social media giant’s shares due to shifting social media habits.

Facebook was trading at $122 per share the day of the above Bloomberg report, with a market cap just below $350 billion.

Fast forward eight months. On April 3, 2017, Facebook was trading at $142.27 with a market cap of $411.24 billion.

Left said he was shorting shares of Facebook because of concerns over the company’s ability to generate revenue through ads, and increased competition from Snapchat Inc. Short selling involves borrowing Facebook shares and selling them to profit if the stock declines, Bloomberg reported.

Left’s call went against the majority of Wall Street, where 88 percent of analysts surveyed by Bloomberg had a buy rating on Facebook stock.

“It’s not on my list in the way that other shorts have been on my list. What’s amazing about Facebook is the amount of group-think involved, thinking that they can just evolve, evolve, evolve, without any hurdles in the way,” Left said in an interview with Bloomberg TV. “I just think that expectations and investor expectations are a little bit outpaced the realities of what they’re going to face in the next 12 to 24 months.

“So by me saying that maybe in a year and a half from now Facebook is going to be a $200 billion dollar company or a $250 billion dollar company, it’s not such a bad thing,” he said.

Short selling is far riskier than buying puts, according to Investopedia. While there are some similarities between the two, short sales and puts have differing risk-reward profiles. Neither are suitable for novice investors:

Short sales and puts can be used either for speculation or for hedging long exposure. Short selling is an indirect way of hedging. Puts, however, can be used to directly hedge risk. With short sales, the reward is potentially limited (since the most that the stock can decline to is zero), while the risk is theoretically unlimited. On the other hand, if you buy puts, the most that you can lose is the premium that you have paid for them, while the potential profit is high. Short selling is also more expensive than buying puts because of the margin requirements.

Is Left right or wrong? You be the judge: 10 reasons to bet against Facebook’s stock with put options.

Bigstock

Fake News

Facebook admitted in its Form 10-K that the distribution of potentially false or defamatory content could hurt its bottom line. Facebook faces claims of content “related to defamation, dissemination of misinformation or news hoaxes” that could put the company at risk, Fast Company reported. Countries that have different laws from the U.S. could make Facebook regulate this kind of content. Facebook sees this as an unforeseen risk, according to Cale Guthrie Weissman at Fast Company:

“We need look no further than Germany which sought to fine Facebook for content it pushes that is considered false. It’s unlikely this fake news problem will actually hinder Facebook’s performance, but definitely interesting that the social network is taking seriously its impact on its long-term growth.”

Bigstock

Facebook is stumbling over its own ad network off the platform

Facebook took a step in May 2016 towards becoming the internet’s advertising exchange after announcing that it would start showing ads to non-users across the web. Previously, if you were not a Facebook user or not logged on to the social network, Facebook ads on third-party websites or mobile apps powered by the Facebook Audience Network were invisible to you, Telecruch reported. Audience Network started in 2014 as Facebook’s conduit to send ads outside the social network while still allowing advertisers to manage their targeting data.

Facebook faced criticism from advertisers over lack of transparency in the process, according to KillItOnline. GroupM, a large media buyer and one of the critics, advised clients in its network against buying Facebook ads because of the “complete lack of transparency.” Some advertisers are starting to look for alternative advertising outlets.

Facebook recognized the challenge. In March 2017, Facebook adopted header bidding, allowing publishers to get a better look at which ad network can get them a better deal. But header bidding is only available for mobile sites.

And there’s still a question of how much advertiser demand Facebook will be able to funnel toward publishers, Marketing Land reported. In addition to GroupM, Publicis Groupe’s DigitasLBi advised its clients not to buy from Facebook’s Audience Network over transparency and control issues.

Bigstock

Instant Articles got poor feedback from some publishers

High-profile publishers like New York Times, The Guardian, National Geographic and NBC were early adopters when Facebook launched Instant Articles in May 2015, pitched as “a new way for any publisher to create fast, interactive articles on Facebook.” With Instant Articles, publishers host stories directly on Facebook’s platform instead of their own websites so they load faster on phones, according to a report by trade group Digital Content Next.

Facebook claimed it delivered 10-times-faster load times, users read 20 percent more Instant Articles on average, and were 70 percent less likely to abandon an Instant Article, Clickz reported. Facebook sweetened the deal by allowing publishers to keep 100 percent of revenue from the ads they sold themselves against their Instant Articles inventory. Less than two years later, some publishers are starting to scale back their use of Instant Articles, citing restrictions on the number and kinds of ads they can incorporate into their content, according to Digital Content Next. That’s making it more difficult for them to make money compared to their own websites, which they have full control over.

Many publishers are ambivalent about Facebook’s commitment to helping them maximize their revenue, and are starting to realize that the relationship itself might not be in their best interests, Digital Content Next said:

This isn’t just a Facebook trend. Snapchat, which has courted publishers with its Discover platform, is seen as “hold(ing) little to no short-term financial interest” despite the fact that some Discover publishers employ staff dedicated exclusively to create content for Discover. The question now: how much longer will publishers continue to dedicate time, energy and money to third-party platforms that appear to be receiving more from publishers than they’re giving to them?

Image: trade.education

Price-to-earnings Ratio comparison

A critical number in evaluating a stock is the price-to-earnings ratio. Currently the P/E ratio of Facebook stands at 40.89, Free Observer reported on April 3:

Looking at this figure it suggests that the shares of Facebook may be overvalued, however, this can also depend upon the situation of the market. If the market is strong then it could suggest that Facebook is a good investment, however if the market is weaker then it could suggest that the shares are undervalued.”

Image: hackread.com

Increasing regulatory risks in Europe

Facebook has 29 million users in Germany, where social networks face up to $53 million in fines if they refuse to remove illegal content or fail to give users the option to complain about hate speech and fake news, Bloomberg reported on March 14. If passed, a bill now in its first draft will be the stiffest regulation Facebook faces in any country where it operates. Twitter and Facebook deleted 1 percent and 39 percent respectively of content flagged as illegal by users in Germany, according to a report commissioned by the country’s Justice ministry. Google’s YouTube by comparison, deletes 90 percent of content flagged as illegal. “Social networks need to delete or block ‘obviously illegal’ content within 24 hours after it’s been flagged, and other illegal content within seven days, according to the legislation,” Bloomberg reported.

Bigstock

Marketers are catching on to Facebook’s lack of transparency

The Association of National Advertisers, a trade group for marketers, slammed Facebook in 2016 for lack of transparency after the social network said that it overestimated video viewing for two years, Media Post reported. “Facebook has not yet achieved the level of measurement transparency that marketers need,” ANA President-CEO Bob Liodice said in a blog.

Facebook’s metrics have yet to be accredited by industry self-regulation ratings watchdog, the Media Rating Council, and an audit of the social network’s metrics still has not been completed. “With more than $6 billion of marketers’ media being directed to Facebook, we believe that it is time for them and other such major media players to be audited and accredited,” Liodice said. “That is the standard of accepted practice that marketers and agencies have relied on for decades.” A survey found that 97 percent of marketers believe digital media owners should allow their inventory to be measured by a third party.

Facebook promised to undergo audits by the Media Rating Council, Wall Street Journal reported on Feb. 10, 2017. That will include metrics such as how many ads in a given campaign are viewable, how long these ads appear on various screens and whether sound was on for video ads. It could mean that more Facebook data will be vetted by independent third parties, which advertisers can then use when evaluating media buys on the platform, WSJ reported. Advertisers have requested new ad-buying options including the ability for brands to pay only for video ads that run to completion.

 

Photo: Branding In Asia Magazine

Increasing competition

Facebook is the most successful social media platform in the world, but its valuations suggest an unrealistic amount of future growth, Seeking Alpha reported in October.

Competition is the most significant threat Facebook faces. While the firm has managed to beat back its early rivals, Twitter and MySpace, without much trouble, the current competition is fierce and holds several competitive advantages that the legendary platform will be hard pressed to match. The firm faces competition from international firms like Tencent and VK that is expected to push down Facebook’s user penetration around the world.

Facebook has had a strong run, and many investors believe the company has more growth in the future. However, there are headwinds to Facebook’s growth and when monthly active user growth slows – or even declines – there will probably be a correction in the stock price.

Peter Thiel. Photo: Fred Prouser/Reuters

Diversity issues

There have been calls to kick billionaire venture capitalist and early Facebook investor Peter Thiel off the Facebook board of directors because of his ties to President Donald Trump.

Facebook Founder Mark Zuckerberg defended Thiel in March at a Q&A with students at North Carolina A&T State University, Business Insider reported:

“We have a board member who is an adviser to the Trump administration, Peter Thiel,” Zuckerberg said. “I personally believe that if you want to have a company that is committed to diversity, you need to be committed to all kinds of diversity, including ideological diversity. I think the folks who are saying we shouldn’t have someone on our board because they’re a Republican, I think that’s crazy.”

In 2014, Facebook released its demographic data for the first time. Facebook started incentivizing recruiters in 2015 to find engineering candidates who weren’t well represented – women, black and Latino workers. But during the final stage for engineering hires, a small committee of high-ranking engineers has veto power over promising candidates, and they’re hindering progress on diversity goals, Bloomberg reported.

Facebook hasn’t shown much progress in increasing the number of women, black or Latino workers. From 2015 to 2016, Facebook’s proportion of women in tech grew from 16 percent to 17 percent. Black and Latino U.S. tech workers stayed flat at 1 and 3 percent.

The disconnect between what Facebook claims to be doing and what they’re actually doing is substantial, Blavity reported in 2016.

Angela Benton, Founder and CEO of Silicon Valley accelerator NewMe, published a piece on Inc.com on “Why Facebook’s Latest Shot at Diversity Misses Its Mark.” It analyzed how the tech giant’s new diversity initiative, TechPrep, seems to be a temporary effort funded by McKinsey & Company, not Facebook itself:

The goal of their new initiative is “to promote computer science and programming as a career option and to provide resources to get started” for multicultural young professionals. Through her article, Benton points out that this sounds a lot like Facebook is doing the work while McKinsey is fronting the cost. She makes note that it seems as if Facebook, a wildly-successful household-name of a company, couldn’t find the funds to support a long-term, impact-making diversity program.

Facebook responded by asking Benton to amend her piece. She declined.

“When it comes to big technology corporations actually diversifying who works there, I think the approach Silicon Valley tends to take is myopic,” Benton said. “To solve the issue, they’re going to have to be a little bit more deliberate about who they want to hire. These are innovative companies, so they’re going to have to be innovative to change this because clearly what they’ve been doing hasn’t been working.”

Bigstock

Video views are not premium video views

Premium (non-live) video may be the next big Facebook thing in 2017, but it’s possible something else again will dislodge that in 2018, Musically reported on Jan. 18, 2017. Facebook’s move into live video in 2016 was aggressive and successful. New research by eMarketer appears to show Facebook overtaking YouTube in the live video category.

The figures, based on a U.S. survey by UBS Evidence Lab, found that between June and November 2016, the percentage of U.S. internet users watching live video on Facebook rose from 14 percent to 17 percent, while the percentage watching live video on YouTube fell from 21 percent to 16 percent. Every platform but Facebook saw its percentage drop during that six-month period. eMarketer warned that the survey may be flawed – do people saying they watch live video on YouTube really mean live streams? – but noted that when the data is broken down generationally, it’s millennials who are driving this viewing: 63 percent have watched live video online and 42 percent have broadcast some themselves.

A new report suggests that the social network’s video strategy may be shifting again. “Numerous publishers tell Recode that Facebook is de-emphasising live video when it talks to them,” the tech site reported in January, adding that few publishers expect Facebook to continue paying them to broadcast live on its platform once its current set of deals elapse. “Instead, Facebook is pushing publishers to create longer, premium video content… The hope is to get more high-quality video onto the platform and into your News Feed — the kind of stuff, presumably, you might find on Netflix. Facebook may pay publishers for that stuff, instead of paying them to make live video,” claimed the report.

That may not be good news for traditional news publishers, who piled in to Facebook Live – especially if these streams are also de-emphasised in the social network’s news-feed algorithm. Like games publishers, page owners and non-video news sites before them, the live broadcasters may now need to invest in non-organic means to maintain their audiences.

Photo: Y Combinator

Facebook still hasn’t monetized WhatsApp. Is it even doable?

When Mark Zuckerberg acquired WhatsApp in 2014 for $19 billion, Facebook said it would start monetizing the messaging platform once it reached 1 billion users. WhatsApp has 1.2 billion users, but apart from passing comments about the opportunity for businesses to reach out to their customers, there’s not even a hint of Facebook’s plans to cash in on the investment, RedDrop reported on Feb. 11, 2017.

At its fourth quarter earnings call, Facebook said WhatsApp and Facebook Messenger have very different value propositions, with the WhatsApp offering a more “stark experience”:

The longer Facebook waits before monetizing WhatsApp, the more expensive it’s going to be just to run the operations. Moreover, the original acquisition included quite a bit of equity. As the shares and RSUs (restricted stock units) vest over time, it dilutes earnings. That means more burden on investors than necessary. Now, Facebook is already trying to justify the high cost of the acquisition, saying in their 10-K filed this month that “As of Dec. 31, 2016, no impairment of goodwill has been identified.”

Facebook has had two years to figure out the best way forward. There’s reason to think the app can be a major contributor in the future, The Street reported:

Facebook is quite good at using its talent and data to monetize its platforms on a large scale, once it gets serious about doing so. In March 2017, Reuters reported WhatsApp is “testing a system that would let businesses talk directly to WhatsApp users for the first time.” The feature … gives WhatsApp a chance to monetize its app by charging businesses to engage users with whom they’re already in contact. Reuters adds WhatsApp is “working carefully to avoid problems with spam messages.”

A handful of Y Combinator startups recently began testing the feature, Reuters reported.

At this point, business bots on WhatsApp seem like a matter of ‘when’ rather than ‘if,” according to The Next Web.

Mark Zuckerberg in 2005. Photo: Youtube interview with Bambi Francisco

Questionable ethics

Going beyond Silicon Valley spin, the historical record suggests that Mark Zuckerberg and Facebook can’t be trusted with their change-the-world mission, said Jamarlin Martin, a pioneer and thought leader in digital media, and owner of Moguldom.com:

“After hundreds of millions of dollars of political advertising going through its systems, a lot of it fake news supporting Donald Trump, Facebook’s founder and CEO had a come-to-Jesus moment after the election,” Martin said. “Zuckerberg’s new religion is to change the world by building communities that are supportive, safe, informed, civically engaged and inclusive. Facebook must change itself before it can really have real impact on the issues that matter, first in the U.S. and then the world.

“First, we need to understand the psychology of Zuckerberg. I believe the problem with Facebook goes back to how the company was started — opportunistic cheating and greed.

“The world already knows how the original idea was based on a business client who hired Zuckerberg to consult them on a college dating site. This business client would later receive millions of dollars in a settlement for an infringement of their intellectual property. Shortly after this first questionable — if not illegal — behavior, Zuckerberg attempted to cheat his partner, Eduardo Saverin. The planned scam to cheat his equity partner was almost successful but the paper trail proved too much.

In May 2012, Business Insider published a 2005 email written by then-20-year-old Zuckerberg to his lawyer giving him the go-ahead to draft paperwork that would result in Saverin’s dilution.

It’s “an artifact of a young Mark Zuckerberg – a man who has grown up a lot since he wrote it, and will be in our lives for a very long time,” Business Insider reported. Here’s an excerpt from that email:

“Anyhow, Sean and I have agreed that a price of one-half cent per share is the way to go for now. We think we can maybe almost justify and if not, we’ll just deal with it later.

We also agreed that if the company bonusing us the amount we need for the shares, plus tax, is a good solution to the problem of us all being completely broke.

As far as Eduardo goes, I think it’s safe to ask for his permission to make grants. Especially if we do it in conjunction with raising money. It’s probably even OK to say how many shares we’re adding to the pool. It’s probably less OK to tell him who’s getting the shares, just because he might have adverse reaction initially. But I think we may even be able to make him understand that.

Is there a way to do this without making it painfully apparent to him that he’s being diluted to 10 percent?”

View Comments
  • Amber Laws

    Great article.