Is Facebook (FB) A Smart Long-Term Buy?

·5 min read

Rowan Street Capital LLC, an investment management firm, published its "Summers Value Fund" second quarter 2021 investor letter – a copy of which can be seen here. A return of +4.7% net of fees, was recorded by the fund for the second half of 2021, below the +15.2% return of the S&P 500. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Rowan Street Capital LLC, the fund mentioned Facebook, Inc. (NASDAQ: FB), and discussed its stance on the firm. Facebook, Inc. is a Menlo Park, California-based social networking service company, that currently has a $999.3 billion market capitalization. FB delivered a 29.51% return since the beginning of the year, while its 12-month returns are down by 40.41%. The stock closed at $356.30 per share on July 30, 2021.

Here is what Rowan Street Capital LLC has to say about Facebook, Inc. in its Q2 2021 investor letter:

"Facebook recently hit a trillion dollar valuation on some very strong earnings and legal news. We encourage you to review our brief investment rationale on Facebook that we included in our 2019 Year-End letter.

The company recently crushed analyst estimates when it reported its first-quarter results. Revenue surged 48% year over year to $26.2 billion, leading to a 94% increase in net income. Analysts were expecting revenue of about $23.7 billion. Growth, said Facebook CFO Dave Wehner on the first-quarter earnings call, was fueled by "sustained growth in the digital economy and our continued success in helping businesses engage with consumers across our services." More specifically, Facebook's advertising business was helped by a 30% year-over-year increase in price per ad and 12% more ad impressions across all of the company's services.

In addition, Facebook shares were lifted further on some very good legal news for the social media giant. The FTC, which was spearheading the suit, requested that Facebook be forced to divest two major company acquisition — photo sharing site Instagram and messaging service WhatsApp. Judge Boasberg ruled that the FTC failed to demonstrate that Facebook's power and reach were sufficient for such a legal remedy. As for the states' lawsuit, the judge said that they waited too long to file complaints against the two offending acquisitions (the Instagram deal closed in 2012, and WhatsApp was absorbed by Facebook in 2014).

We started buying Facebook shares back in 2018 when the stock was very depressed as Facebook was dealing with a long ‘dirty-laundry’ list of challenges. What started as criticism regarding the privacy issues that came to light after the 2016 U.S. presidential election had turned into a general lashing of the platform from just about everyone. They responded by spending gobs of cash and hiring thousands of employees to update its platform and make it safer for users. Additionally, it recorded the $5 billion FTC fine in the second quarter of 2019 and a $550 million settlement related to the collection of users' facial recognition data from 2011 to 2015 (in violation of the Illinois Biometric Information Privacy Act) in Q4.

In spite of these huge expense increases, we estimated that their revenue would still grow at least 20% and their future expense increases would be closer to revenue growth. We were convinced that FB remains an extraordinary business with incredible moat (2.9B users), and they still have tons of opportunities to profitably reinvest their capital. We have been very impressed with how Zuck & Co. handled a long list of challenges over the past few years and managed to keep growing and innovating! We have doubled our money thus far on our Facebook investment over the past 3 years, and are happy to remain shareholders as future prospects remain bright for the company.

Our Facebook investment record begs to ask the following question. If the markets are efficient, how come we have been able to double our money in only 3 years (26% annualized return) on the company that is well-known to everyone in the world and is widely covered by the analyst community?"


Photo by Timothy Hales Bennett on Unsplash

Based on our calculations, Facebook, Inc. (NASDAQ: FB) tops our list of the 30 Most Popular Stocks Among Hedge Funds. FB was in 257 hedge fund portfolios at the end of the first quarter of 2021, compared to 242 funds in the fourth quarter of 2020. Facebook, Inc. (NASDAQ: FB) delivered a 9.77% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.

Disclosure: None. This article is originally published at Insider Monkey.

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