Facebook Insight — Can Facebook Deliver?

Julian Koski, Co-Founder and Chief Investment Officer, New Age Alpha
Apr 15, 2021 1:55:40 PM 6 min read

Unlike other companies we’ve covered recently in these Insights, such as Delta or Netflix, who were alternately hurt or helped by the pandemic, Facebook seemed to exist in a sphere all its own. While seemingly constantly in the news for unsavory reasons pre-Covid, the stock shrugged off all of those headlines. And then in the pandemic, its growth only continued. As a member of the so-called “FANMAGs” (Facebook, Apple, Netflix, Microsoft, Amazon, Google), their stock became simultaneously a growth story and a safe haven story. The risk of human behavior was very evident. In essence, the question through all of this became less, “Is Facebook a good investment?” and more, “How good of an investment is Facebook?” The Human Factor may have the answer.

The Human Factor measures the probability a company will fail to deliver the growth implied by the stock price. This may be caused by investors interpreting vague and ambiguous information in a systematically incorrect way. In Facebook’s case, in which it effectively only went higher, human behavior likely didn’t cause the stock to fall. But could it have driven the price too high?

Human Behavior’s Impact on Facebook

  • From the beginning of 2013 to today, Facebook (FB) rose from approximately $30 per share to approximately $300, and the only two major corrections occurred side-by-side with the overall market swoons of December 2018 and March of 2020. In fact, in a very general sense, its rise tracked that of the S&P 500
  • Some contend that such similarities with the S&P 500 are too close, however. A growing chorus of people contend that the FANMAGs have taken on an outsized portion at the top of it and fear that a bust in any of those specific companies might create a similar outsized impact in the Market Cap-Weighted Index. It’s a concern…yet a concern borne of human behavior impacting a stock price.
  • At New Age Alpha, we seek to avoid the losers by using an actuarial approach similar to that used by the insurance industry. Put simply, we avoid the vague and ambiguous information. As of April 8, 2021, based upon Facebook’s stock price and strictly the known financial information (financial statements, etc.), we believe there is a 33.8% chance that Facebook will fail to deliver the growth implied by its stock price.
  • With a Human Factor of 33.8%, we believe that Facebook appears likely to deliver the growth implied by its stock price but some caution may be prudent. Remember, the lower the Human Factor the more likely vague and ambiguous information has NOT been priced into the stock.

Facebook's Position in its Industry

  • As of April 8, 2021, Facebook had a better Human Factor score than many, but not all, of its peers in the Communication Services sector. Whereas Facebook had a score of 33.8%, the sector had a median Human Factor of 50.4%. Of the 22 companies in the Sector, Facebook was 6th overall according to Human Factor.
  • A similar situation holds true within select Industry Groups. The median Human Factor of the Media & Entertainment Industry Group is 47.1% and, for comparative purposes, the Telecommunication Services Group is 54.7%. Each is still worse than Facebook’s Human Factor score of 33.8%.
To explore the Human Factor for the S&P 500® and over 5300 global stocks, ETFs and indexes, please visit New Age Alpha’s H-Factor System.

Disclosures

Past performance is not indicative of future results. Current and future results may be lower or higher than those shown. An investor utilizing the Human Factor may experience a loss. No client or prospective client should assume that any information presented in this article serves as the receipt of, or a substitute for, personalized individual advice from New Age Alpha or any other investment professional. All research and data are simulated and should not be considered indicative of the skill of New Age Alpha.

The accuracy of the Human Factor is materially reliant on the integrity of the information utilized in the calculations, including any assumptions and or interpretations made by the user about the data. Data discrepancies, and user assumptions, can all contribute to differing outcomes. The underlying assumptions and processes presented herein are subject to change. New Age Alpha reserves the right, in its sole discretion, without any obligation and without any notice, to modify the information contained in this material, or to correct any errors or omissions in any portion of this material at any time.

The Communications Services Sector and Industry Groups referenced in this insight is based upon the Global Industry Classification Standard (“GICS”), which is an industry taxonomy developed in 1999 by MSCI and Standard & Poor's for use by the global financial community. The GICS structure consists of 11 sectors, 24 industry groups, 69 industries and 158 sub-industries into which S&P has categorized all major public companies. 

The above statements are not an endorsement of any company or a recommendation to buy, sell or hold any particular security. Investors are urged to consult with their financial advisors before buying or selling any securities. The views stated herein are only current through the date stated and are subject to change at any time based on market or other conditions and New Age Alpha disclaims any responsibility to update such views. Any Human Factor information or charts presented herein or utilized in the Human Factor system are provided for illustrative purposes only. The Human Factor information provided herein is a snapshot taken at a particular point in time and any analysis or information contained in this document is outdated and should not be relied upon as investment advice. Moreover, the information presented in this document may have changed materially from the date on which it was created. New Age Alpha may or may not currently own the securities at the times set forth in this article. There is no intention for New Age Alpha to include these securities in its portfolios unless it becomes part of the established universe of eligible securities that are part of each specific investment strategy (e.g. the S&P 500®). It is important to note that there can be no guarantee that the application of the Human Factor to investment portfolios or certain stocks or securities can produce profitable results.

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