Is it time to short Facebook?

It has often puzzled us here as to why exactly Facebook bought messaging app Whatsapp for $19B last year. As time marches on and we gain some historical perspective of the deal, its becoming readily apparent that the real reason was existential fear:


The chart above plots the Google search volume for the terms “facebook”, “whatsapp”, “twitter”, and “myspace” (remember this guy?) As the graph makes clear, things can change very quickly in tech: MySpace went from alpha to omega dog in less than three years. Facebook and Twitter killed MySpace, but could this cycle of regicide repeat itself? The answer is unambiguously yes.

In the past we have shown how search volume data can be used to analyze the stock market, and today we make use of our gtrends Python library to extract the search data from Google Trends. Both Facebook and Twitter, the paragons of the Web 2.0 paradigm, reached their peak search volumes in early 2013. This indicates market saturation in their core products.

These developments help explain why Facebook felt compelled to splash out billions on purchases outside their core platform. Right now the growth of Facebook’s share price seems to be driven almost entirely by interest in Whatsapp:
fb_02For the time being, acquisitions are driving FB’s share price. But the steady decay of interest in Facebook’s core product should be very troubling for it’s investors. Momentum is endemic in internet businesses, and size begets size when it comes to social networks. But momentum works in both directions. The traditional formula for Facebook is in a long-term decline and it has become reliant on chasing the next big thing from the outside. While it is far too early to pronounce the death of Facebook, the risk is ratcheting ever higher that changing tastes from internet users will render Facebook irrelevant in the near future.

Moreover, Whatsapp has competitors like Snapchat hot on its heels. The barrier to entry is comically low: anyone can make a messaging app but can you make people use it? So far this has been Whatsapp’s chief success. However, when the only protection to your business model is network size you are bound to lose market share as competitors bloom up like mushrooms. Think of Groupon, literally anyone could giveaway coupon’s online and they did. As such, we are keeping a close eye on the prospects of the message app complex going forward as it is closely tied to Facebook’s future fate.

Want to learn how to mine social data sources like Google Trends, StockTwits, Twitter, and Estimize? Make sure to download our new book Intro to Social Data for Traders by our very own Thomas Pendergrass

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