Facebook Had an Impressively Bad Day

(Bloomberg Opinion) -- Congrats Facebook?

It’s not every day that you see “ the largest ever loss of value in one day for a U.S.-traded company,” but if yesterday’s post-close trading reflects today’s closing price, then Facebook Inc., which lost as much as $151 billion of market capitalization at one point after the close yesterday after announcing disappointing growth numbers and guidance, will claim that record. (As of 10 a.m. today the stock was down about 19 percent, about a $120 billion drop in market cap, well on target for the record.) The current holder is Intel Corp., which “lost about $91 billion on one September day in 2000.” There at least there was a tech bubble bursting all around them. Here, “before the results were announced, Facebook’s shares had closed in New York at $217.50, a record high, and had gained 23 percent this year.”

Really it is a record to be proud of. It’s not that Facebook’s business is bad—it is very, very good—only that it is not as astonishingly perfect as Facebook’s shareholders thought it was. Facebook’s disappointing earnings included $5.1 billion of net income for the second quarter, up 31 percent from last year. There are worse things! And the list of largest-ever one-day market-cap losers is actually great company. There’s no Enron, no Lehman Brothers; it’s full of still-giant companies like Apple and Amazon and ExxonMobil. 

There is a popular, slightly tongue-in-cheek notion in the financial industry that losing a billion dollars of client money is a badge of honor, something to be proud of, a good thing to have on your resume. It shows you can bounce back from adversity, etc., but more importantly it shows that clients trusted you with a billion dollars and you had the confidence to take risks with it. Losing $150 billion of shareholder money shows, at a minimum, that Facebook had shareholders who believed in it to the tune of almost $630 billion (as of yesterday’s close); you can’t lose $150 billion of market cap without first having $150 billion of market cap. I submit that losing $150 billion of market cap in a day is a more impressive financial accomplishment than anything that almost any other company has done in the history of stock markets.

Aaaaaaaaaaaaaaaarguably losing $150 billion also shows that Facebook had the confidence to change its business in ways that reduce growth and advertising revenue, in order to make it more sustainable and better at “connecting the world,” etc.:

After the General Data Protection Regulation went into effect in Europe, Facebook started asking people to check their privacy settings and make sure they wanted to share certain kinds of data. Facebook is rolling out a version of those protections to the rest of the world. If users choose to share less data with Facebook, that could hamper the company’s ad-targeting abilities, making it less attractive to marketers.

While privacy was an issue in Europe, politics played a role in North America, which is the company’s most lucrative advertising market. Facebook disrupted some business by putting in place new rules to get all political advertisers to verify their identities. The company may have halted more ad purchases than expected as it applied a broad definition of what’s considered “political.”

You could certainly read this the other way, and argue that Facebook’s disappointing results came because it was too smug and overconfident and refused to change its business model until it led to regulatory pushback and political risk and user defections and hastily-constructed fixes. It is also a little tempting to divide that $150 billion number by another number disclosed yesterday, Facebook’s 2.5 billion monthly active users across its various platforms. Like: If yesterday’s results are an indication that Facebook is going to grow more slowly by being less rapacious with user data and privacy and targeting, then the cost to Facebook’s shareholders of that reduced rapacity looks to be about $60 per user. Is that … a good trade? Would you pay $60 (once) to use a somewhat more chill version of Facebook? Is the right way to think of yesterday’s results as a $60-per-user transfer from Facebook’s shareholders to its users?

In other Facebook rapacity news, the parents of a child killed in the Sandy Hook massacre wrote an open letter to Mark Zuckerberg about Facebook’s dissemination of “crisis actor” conspiracy theories: 

But we are unable to properly grieve for our baby or move on with our lives, because you, arguably the most powerful man on the planet, have deemed that the attacks on us are immaterial, that providing assistance in removing threats is too cumbersome, and that our lives are less important than providing a safe haven for hate.

Who should do what?

Man, I like the cut of Inigo Fraser-Jenkins’s jib. He’s the Sanford C. Bernstein & Co. analyst who put out the (in)famous note claiming that passive investing is “Worse Than Marxism,” and now here’s this piece of financial speculative fiction: 

Amazon.com Inc. is well positioned to shake up the asset management industry, according to a new strategy report from Sanford C. Bernstein & Co.

The Seattle-based company’s broad customer base and online platform would give it an edge among big tech companies in asset management, most likely as “an arms-length distributor of funds” rather than as a “super-active manager,” Bernstein analysts including Inigo Fraser-Jenkins wrote in a research note Tuesday. They cautioned this is just speculation as there’s no sign that Amazon is pursuing asset management at this time. 

I mean, you know, sure. Pick an industry. Amazon may get into that industry. It may even be good at it. Amazon seems to be good at things. You might as well write about the industry you know. 

My vague thesis about the tech giants and asset management is, look, if you have gone to the trouble of compiling and indexing and analyzing all of the world’s information, and if you have hired the world’s leading experts in using computers to find patterns and signals in data, then at some point, why not use that to trade stocks and bonds and whatever? I sometimes get the sense, in reading about Renaissance or Man Group or Quantopian or whatever, that asset management might be a trivial subset of data science, that if you are a top-level spotter of patterns in data then all it takes is a few extra wires and lines of code to also become a top-level hedge-fund manager.

And I always find it a little weird that Alphabet Inc. hoovers up all the world’s information, spends lots of time and money on sophisticated artificial intelligence, and its grand plan for all of this data and analysis is to get better at selling ads. I mean, its grand plan also involves curing death, etc., but its grand monetization plan is the ads. (If people are immortal they will watch more ads.) Facebook, same thing: It knows everything about the thoughts and feelings and intentions of everyone on earth, and uses that knowledge to serve you ads to buy the shoes that you just bought, plus conspiracy-theory videos. Advertising is a big business, and knowing everything about everyone and everything would (and does) make Alphabet and Facebook good at it. But it seems just obviously complementary, once you know everything about what everyone wants, to make some financial bets on the things that people want and against the things that they don’t want. Why not use every part of the data, you know?

Meanwhile Amazon is in a slightly different business, in that it uses its knowledge of what everyone wants to directly sell everyone all the things. That is a straightforward business! I get that. You know I want shoes, you sell me shoes, you take a cut. Great. But I suppose Fraser-Jenkins is right that a logical extension is to also sell mutual funds. Those are things. You know I want a mutual fund, you sell me a mutual fund, you take a cut. It makes sense.

Darts.

“Asset management might be a trivial subset of data science,” I said above, but that’s the nice way of putting it. There is always this:

Investors would have been better off picking companies by throwing darts at stock tables than listening to Wall Street’s geniuses [at this year’s Sohn Conference]. … At the time of the conference, Heard on the Street columnists took on the stock pickers by throwing darts to create a portfolio of 10 stocks to go up against the 12 stocks picked by the Sohn speakers. Three months later, the darts have prevailed. The Heard team’s 10 picks, eight long and two short, have returned 7.23% on average. The combined performance of 12 picks by Sohn attendees has been slightly negative, lagging behind the S&P 500 by more than 6 percentage points.

I am always curious, when people talk about making random stock picks by throwing darts, or hiring a monkey, or hiring a monkey to throw darts, if they are talking metaphorically, or if they are actually throwing darts at the stock tables. Where do you even get printed stock tables these days? Do you have to throw darts at your computer screen? Do they stick? And what if the monkey decides to throw the darts at you? It is a quaintly artisanal corner of the asset-management-criticism industry, this thing where picking random stocks to make the pros look bad requires an archaic process of manual (or animal) labor using ancient tools. It is 2018, really, you can pick random stocks with a few lines of code.

Fannie and Freddie.

Almost 10 years ago, Fannie Mae and Freddie Mac, the U.S. government-sponsored mortgage-guarantee entities, were nationalized and placed into a conservatorship run by the Federal Housing Finance Agency, their regulator. Ever since, politicians and regulators and investors and commentators have said that their situation is unsustainable, and have proposed plans to de-nationalized Fannie and Freddie. And those plans have always gone nowhere, and I have taken increasing delight in the incongruity. It’s gone on for 10 years! That is a pretty good argument that it’s sustainable! At least for, you know, 10 years, which I suspect is a lot longer than anyone expected when they were nationalized back in 2008. The status quo, I tend to think, is good for the government (which gets revenue from Fannie and Freddie and a convenient way to influence housing), and good for borrowers (who get cheap loans) and the financial industry (which gets to make and trade the loans), and so there is just no huge impetus to change it. Also changing it would require action from Congress, and Congress has a lot going on.

There have been some conservative rumblings about privatizing Fannie and Freddie during the Trump administration, which of course have gone nowhere. And last week a federal appeals court ruled that the FHFA was unconstitutional, though not in a way that changes much about the status of Fannie and Freddie. But the latest news comes from the Democratic side:

Representative Maxine Waters said fixing Fannie Mae and Freddie Mac would top her list of priorities if Democrats take control of the House in this year’s mid-term elections and she becomes leader of the Financial Services Committee next year.

Hahaha oh man I want to take the other side of that. If the government is divided, and Democrats control the House while Donald Trump is president, it seems to me that the odds of doing something about Fannie and Freddie go way, way down. And they were already pretty much zero!

Blockchain blockchain blockchain.

“World First As Baby Born On The Blockchain In Tanzania” is, I regret to inform you, the headline here. The story is basically that some Bitcoiny guy wanted a better way to track his charitable contributions, ensure transparency, and make sure that aid was getting to the people it was supposed to get to. So, of course, blockchain:

AID:Tech's blockchain platform effectively allows for traceability of any entitlement that is documented on the blockchain securely and efficiently.

Etc. etc. etc. etc. I suppose if you are trying to provide aid to babies in Tanzania, there is always the risk of fraud. What if some 37-year-old wanders in to your clinic and demands a vitamin K shot, claiming to be a newborn baby? How can you guard against that sort of fraud? The most natural answer is that if you put everyone’s identity on the blockchain, you can ask babies for their public key and check their identity against the blockchain, and if they turn out to be 37 then you know not to give them any aid. I certainly can’t think of a simpler system. 

Things happen.

Qualcomm Scraps NXP Deal Amid U.S.-China Trade Tensions. Inside Google’s Shadow Workforce. Did Albertsons Cos. default on its bonds? Quant hedge funds lose their allure as performance sags. KKR Gains Momentum Among Rivals After Switching to a Corporation. Hedge Fund Titans Who Bet Big on India Now Say They Were Scammed. Temple Online MBA Program Under Investigation Over Marketing. Multiple Arrests During Immigration Protests Outside Jamie Dimon's UES Home. Elon Musk is going around threatening random Tesla shorts on Twitter. Some people are not on the internet. Why It’s Time to Quit Your Job, Travel the World. Bring back irony. Boston accents are haht

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the 3rd Circuit.

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