Why a Long or Short Position in Facebook Is a Tough Decision

With numerous variables in the growth equation, proceed cautiously with Facebook

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Mar 27, 2017
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Instagram, the photo-sharing app Facebook (FB, Financial) bought for a billion dollars in 2012, has been on a record-breaking growth spree, with more than 600 million users globally. Moreover, the company recently hit another crucial milestone of 1 million advertisers. That’s 800,000 more than what they had around this time last year.

With advertisers flocking to parent platform Facebook, whose advertising revenue keeps growing at strong double-digit rates, Instagram has had access to the relationships its parent company has already built. That said, unless advertisers found value in Instagram, they would not have embraced the platform like they did Facebook’s own applications.

But Instagram has demonstrated the growing demand for its product through its fast growing global user base.

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Launched in 2010, Instagram raced to 600 million users in six years, doubling its user base every two years. Not many applications around the world can boast of such fast adoption rates; Instagram seems to be following in Facebook’s footsteps when its comes to user base growth.

When advertisers see that an application is being widely used, they naturally want to move in as quickly as possible and get used to the system. On the one side, one could also argue that most of Instagram’s users will also be on Facebook, and it will be a double counting of user base. But as long as users spend time on Facebook as well as Instagram, Facebook benefits, because it's the amount of time a particular user spends on Facebook and Instagram that matters from an advertising perspective.

The stunning growth of Instagram will provide huge support for Facebook, which is getting close to a stable growth phase due to high levels of penetration in developed markets and growing user base in developing countries.

Facebook’s strong revenue growth, along with applications such as Instagram -- which has not yet reached its full potential -- and WhatsApp -- which is yet to be monetized -- has propelled the stock to trade at high valuation multiples. WhatsApp has a user base approaching 1.5 billion users in its fold, and Facebook is yet to monetize it. Until all these unknowns get clarified, Facebook will be hard to buy as well as hard to short.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.