$FB - Communicating With Shareholders
In April, I posted an article titled "Disruption & The "Right" Owners". The focus of the post was the difficulties that Jeff Bewkes faced during his tenure as the CEO of Time Warner, most notably his inability to respond to a new business model (SVOD, as pioneered by Netflix).

This was the key quote from Bewkes, as retold in Tinderbox:

I met with our big institutional owners and asked if they would support flatter earnings growth... moving HBO faster to the global Netflix model. None of them thought the Turner networks could make that crossing... Our biggest shareholders didn't want us cutting our earnings.”

As I noted, that conclusion had major implications:

"If you take this at face value (not revisionists history), what Bewkes is saying here is quite interesting. Even after identifying the right long-term trends and the bets that needed to be made, his shareholders and the risk of short-term stock price weakness effectively tied his hands. Said differently, as early as 2013 or 2014, Bewkes already knew that he didn’t have the ability to effectively compete with Netflix given the constraints that Time Warner faced. Despite the fact that the game was still in its early innings, Time Warner was already positioned to lose (the company’s DTC service, HBO Max, launched in the U.S. six years later, in May 2020)."

I was reminded of this write-up as I reviewed Meta's (Facebook's) Q1 FY22 results.

On the company's conference call, it was apparent that management - and specifically CEO Mark Zuckerberg - had come to appreciate the importance of addressing their metaverse (FRL) investments more directly and transparently. Said differently, they did a much better job of addressing some of the key questions / long-term assumptions that helped contribute to the ~$250 billion market cap decline after the Q4 FY21 earnings.

I won't repost the entire call here, but it's worth reviewing. You'll see how management is intelligently balancing their long-term strategic objectives with necessary disclosures / guidance to give shareholders some much needed clarity on how to think about investments that are unlikely to have a payoff for another 10+ years (and at a time when the core business faces short-term headwinds). This can be a tough balance to strike, but I'm of the belief that FB management is now in a much better position to manage the short-term and long-term needs / objectives of the business.

Eric Messenger's avatar
Just looking at Facebook on the surface, regardless of which of the dozens of metrics I might look at, a dozen separate valuations, whether it’s vs industry peers or vs unrelated companies, they are an absolutely dominant business, period. So many people are over thinking $FB (in my slightly humble opinion) raking in $30 billion a quarter with 2.5 billion daily active users and owns 4/10 most downloaded apps; yet people complain that their growth “slowed down”
Jensen Butler's avatar
@wall_street_deebo A great point worth bringing to light. One can make the argument it's the most successful company...ever. Controversy, opinions, and moral compass conversations aside - the company reached a massive % of the human population remarkably fast and successfully monetizes their users damn near better than any company I can think of. People often over-knee jerk reaction (in my opinion) at the prospect of decelerating growth as if the ship will sink abruptly. I choose not to own $FB, but you sure as heck won 't see me betting against them any time soon..
Eric Messenger's avatar
@jensen I’ve made more money on buying stocks after their growth story was thought to be dead by average analysts. Including Microsoft, Apple, Facebook, AT & T (although that was a swing trade, more than a long term hold.
Django Brooks's avatar
A tender balance for sure! Sometimes short term and long term goals don’t flow in the same direction and need sound decision-makers to make the best play. Beyond Zuckerberg, who do you think gets this balance right?
The Science of Hitting's avatar
@django_brooks Good question, and I'll pick two from my portfolio that I think are instructive on this.

$DG has done a very good job on balancing short-term financial goals and long-term strategic vision. That's partly due to the counter-cyclical / stable nature of their business, but it also speaks to an established track record under CEO Todd Vasos. They've provided a clear road map on things like DG Fresh and NCI, and now they're in the early stages of doing the same on new formats (pOpshelf), new regions (Mexico), etc.

On the other end of the spectrum, take a look at $SPOT. I'd argue that much of their current problems, in terms of stock price, is attributable to poor disclosures / communication and unclear LT financial objectives (30% - 40% LT gross margins is too vague; compare that to the ~300BPS p.a. of EBIT margin expansion at $NFLX over the past few years, which is a much clearer / more accountable metric). The market is now clearly telling the company that they expect more. We'll see how the company responds at the Investor Day...

Thanks for the great Q!
Rihard Jarc's avatar
Agree. This $FB earnings call was exactly what the investor base needed to hear to stabilize the stock price, and Mark knew that he had to deliver on this, because stock price when you have too big of a moves matter even for the company (SBC, image etc.)

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