Facebook (FB) – Poked In the Eye

by CC March 22, 2018 2:56 pm • Trade Updates

We’ve been pretty critical about Facebook (FB) as a company over the past year and a half. After their fake news problem became obvious to everyone following the 2016 election, and their seemingly tone-deaf response that followed, it seems like a shift was underway to less sycophantic media coverage of the big Silicon Valley tech players, with Facebook in particular. And we had a sense that the news flow would get worse for the company. From Nov of 2016:

Whether Facebook likes it or not they are now gatekeepers to information for much of the world. And with great power comes great responsibility. Whether it’s fighting fake news or having the balls to avoid participating in propaganda in exchange for market share.

And this theme isn’t just confined to Facebook and news. Silicon Valley runs on an assumption that machine learning and wisdom of the crowds is the fastest path to greater efficiency. And that is true. But greater efficiency doesn’t always mean better.

Simply, sometimes the real world hits you in the face.

A couple of times this year we’ve followed up on those thoughts about the company, with ways to protect in the stock. As the negative stories picked up about Facebook, and their responses within their algorithm to adjust, we’ve detailed hedges for those long the stock. The first, from Jan 31st:

I suspect investors have reason to be concerned that the plan will cause costs to go up and ad revenue to go down as the company hopes to reorient its core product back towards your social network as opposed to spammy news and ads.

That initial hedge worked out well as FB got swept up in the plunge that affected the broader market in early February. After the stock rebounded a bit we revisited the stock on February 21st:

But those same issues remain. Facebook is at the center of a lot of criticism right now in a world of “fake news”. Whether that affects customer use is another matter, but clearly the company feels the need to adapt, and those adaptations could have a material effect. I can’t imagine the news cycle will get better for them.

The hedge we detailed on that post was when the stock was 180:

  • Sell 1 FB April 195 call at 2.15
  • Buy 1 FB April 175 put for 4.95
  • Sell 1 FB April 165 put at 2.30

The news since then has gotten a lot worse, with the company now having to explain how Cambridge Analytica was able to access and use 50 million users’ data in the United States leading up to the 2016 election. It’s looking more and more likely that the company execs will get dragged to Capitol Hill to explain. That’s never a good look for a company.

Even worse for the stock, the company will have to continue to adapt in a way that may have a material effect on revenue streams.

With the stock now 166.70 this put spread collar is worth a little more than $5 versus the initial 0.40 cost. Intrinsically it is worth much more than that and it can be worth up to $10 if the stock closes at or below 165 on April expiration. I think for those that have this hedge on it makes sense to be patient and see if the stock hangs around this area for a bit. If it goes lower the hedge will gain and help even more, if it goes sideways it will as well. For those worried about even more downside it may make sense to roll to lower strikes and out a month or two, but there’s no hurry on that right now. Just keep an eye on the stock and if it breaks below 165 then roll.

In a broader sense for the rest of ones portfolio this does feel like a shift of how these companies are viewed by the media and the country at large. For years a company like Facebook could do no wrong in the eyes of investors. Part of that is we’ve been so programmed to treat these massive tech companies (some of the largest and most powerful companies in the history of the world) with kid gloves. They’ve successfully rebranded capitalism as philanthropy in a lot of cases. But at the end of the day, they are still massive corporations always trying to grow their bottom line. And in a lot of cases, we are the product. (for more on this concept of runaway tech companies I highly recommend this piece by Ted Chiang, “Silicon Valley Is Turning Into Its Own Worst Fear“)

As many are now finding out, our relationship with these companies can be downright creepy. Right now it’s Facebook being taken to the woodshed, previously it was Uber. But we all carry around devices from companies like Apple (AAPL) tracing our every move in the real world and sending that data back to who knows where and for what use. We’ve installed speakers from companies like Amazon (AMZN) in our homes that listen to us all day long. Even Google (GOOGL) is scrambling while eveyones attention is on Facebook to clean up the conspiracy cess pool that is a large part of Youtube.

I don’t want to sound like a Luddite here, these companies do make amazing products, and we all use them. But it seems like the era of just allowing them to do whatever they want with our data and a laissez faire attitude about what “information” is factual or a lie is coming to an end. And with that may come a less laissez faire attitude by consumers and investors on these companies’ business models.