I think most people agree, including myself, that Facebook Inc (NASDAQ:FB) has a fun product. It connects people. I’m also the first to admit that I was skeptical of FB stock for a very long time. I just didn’t think advertisers would go for it. I was wrong, as Facebook’s financials have proven.
I’ve written before about the one flaw in everyone’s modeling of FB stock revenues and earnings: What if one day it turns out that the traffic that advertisers believe to be real, turns out not to be real?
Now I’m not making any accusations here. I’m just a skeptical investor. FB discloses on page 4 of its 10-K what deficiencies there might be in its traffic count:
“…there are inherent challenges in measuring usage of our products across large online and mobile populations around the world … In 2016, we estimate that “duplicate” accounts (an account that a user maintains in addition to his or her principal account) may have represented approximately 6% of our worldwide MAUs … we estimate user-misclassified and undesirable accounts may have represented approximately 1% of our worldwide MAUs.”
Okay. Fair enough. Yet, some things don’t pass the logic or “reasonableness” test. Facebook reported about 2 billion MAUs in the previous quarter.
Now, Facebook defines MAUs as, “a monthly active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, or used our Messenger application (and is also a registered Facebook user), in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community.”
The global population is 7.52 billion people. Facebook is not permitted in China, so that cuts the available global population to 6.12 billion. Back out about 120 million for Iran and North Korea combined, and we have 6 billion.
While Mark Zuckerberg & Co. are making headway with “Facebook Lite” in emerging markets, Facebook still doesn’t have much of a presence in the world’s 30 poorest nations. In Russia, Facebook barely cracks its list of top 10 websites. Total possible global usage is thus something like 5.75 billion.
As much as 25% of the world’s population are children under age 14. However, 52% of kids under age 16 use Facebook. So take 87% of 5.75 billion and you get right about 5 billion.
There are supposedly 1.32 billion daily average users. I’m supposed to believe that nearly one out of every four human beings log onto Facebook every day? Not a chance.
Now I admit all of these are estimates. I’m also admitting that the following is anecdotal and may mean nothing. My goal here is to raise questions. Yelp Inc. (NASDAQ:YELP) reported in its last earnings release that it discovered a bunch of fake traffic “from a single robot.”
That took traffic down to 77 million desktop views from 79 million in Q3 2016 ; from 73 million to 68 million in Q4 16; from 84 million to 78 million in Q1 17; and by an unknown amount in Q2.
That’s just what Yelp actually discovered. In this case, the amount of bot traffic accelerated from about 2.5% to 7%, and possibly more.
Now, check this out. Start digging around the internet and you’ll find more unsettling allegations about Twitter Inc (NYSE:TWTR). There are accounts I’ve seen where tweets are made every ten seconds.
There are even sites you can go to that estimate the amount of fake traffic to individual Twitter accounts. The NY Times Twitter account supposedly has 39.1 million followers, but the audit website estimates that 46% of its traffic may be fake.
Which is to say — I would be extremely skeptical of the real numbers coming out of any of these social media companies. Since ad buyers spend money based on how much traffic a site has, at what point does the house of cards topple?
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
