Coca Cola Bottling Shares Surge 130% After Name Change: Could FinTech Be To Blame?

Hat tip to Upslope Capital for bringing this to people's attention. It appears that do-it-yourself investors relying on tech platforms to invest need to be even more careful than some may have previously thought. Sure, having a computer decide your asset allocation could be problematic long term, but it turns out that even someone trying to buy Coca Cola stock might get into trouble if they don't do their homework.

Whereas Coca Cola trades under the symbol KO, their largest bottler/distributor trades under the symbol COKE. The latter used to be called "Coca Cola Bottling Co Consolidated," which made it easier to understand which stock was which (given that the "real" Coke did not trade under "COKE"). Then in January the bottler changed the company name to "Coca Cola Consolidated" and dropped the "Bottling" completely.

So what happened? COKE shares almost immediately surged more than 130%:

COKE.png

So much for being just a boring bottler of soft drinks... COKE shares rally from under $130 to a peak of $413 in just four months after a questionable name change.

What could possibly have prompted such a huge move in this once boring stock? Well, one theory was floated by Upslope Capital; the name change itself!

If you read through their report (linked to above at the outset), you will notice that users of the popular Robinhood investing app have gobbled up COKE stock this year, likely due to the fact that searches for "Coca Cola" bring up the name of the bottling company with the stock symbol COKE. If you were a young, amateur investor, you probably would not think twice about putting in a buy order thinking you were getting shares in the mega cap global beverage giant that counts Warren Buffett as an investor and sports a total market value of more than $200 billion (70 times bigger than the bottling company!). And then you would wind up with an investment in the far smaller bottling company. And worse, your fellow investors would be doing the same, helping to push the stock up more than 100% in a matter of months!

While the air has come out of the balloon in recent days, COKE is probably still overvalued at $316 per share. I suspect sometime over the next year the stock trade back to $200 or $250 and plenty of investors will wonder exactly how they lost so much money on such a dominant company's stock.

While technology surely will play a role in evolving the investment process for many, the idea that hiring a human being to assist you with your savings and investment objectives is unlikely to become outdated for the majority of folks, for reasons exactly like this one. Sometimes the computers are going to be value-destructive, not value-additive as intended.

Full Disclosure: At the time of writing, I am short shares of COKE, but positions may change at any time.

Will A Barrage Of Tech Unicorn IPOs Mark The Top?

Back in the tech bubble of the 1998-2000 era investors were left holding the bag because they paid up mightily for small, fast-growing companies that were losing money but promising dominant long-term businesses based on fast growing end markets. Paying 15 or 20 times annual revenue became the norm because earnings were negligible. Sell side analyst recommendations went something like "we recommend shares of XYZ at 15x our forward 12-month revenue estimate, as peers are trading for 20x."

During the current bull market there was not a lot of this kind of froth in the tech sector, even though it has once again grown to be the largest in the market (31% of the S&P 500 by market value today). Companies like Apple, Facebook, Google, and Microsoft were growing nicely and had a ton of GAAP profits and free cash flow to back up the valuations. There were some exceptions like Amazon and Netflix, but it is hard to argue that they will not achieve solid profit margins at some point, and they are likely going to dominate their sectors on a global basis (exactly what those margins ultimately will be is an open question, and certainly up for debate).

Over the last year or two, cloud-based software companies are copying the Amazon/Netflix model. Given annual growth rates of 20-30%, investors are giving them a pass, despite stock-based compensation costs that are well into the double-digits as a percentage of revenue, and with sales and marketing budgets of 40-60% of revenue (whereas something more like 20-30% used to be the norm). These stocks trade at 10 times sales or more, and for that reason I cannot justify investing in most of them, but given that they are software businesses with high gross margins, these firms could make nice money today if they wanted to (cut sales and marketing to 20% of revenue and viola, your margins explode).

But as long as the public markets are valuing your stock as if you were already at peak margins and still growing 20-30% per annum, there is no reason to change your behavior. And since they can pay their employees with lots of stock, most of these companies are not burning much cash, if any, so the balance sheets are in good shape.

This week I believe we are seeing the next phase of the tech cycle with the Lyft IPO. These tech "unicorns" (firms with private market valuations of at least $1 billion) are about to flood the market with initial public offerings in 2019 as venture capitalists seek to cash out.

But something is different with these unicorns like Lyft; the income statements are gut-wrenching and look a lot more like 1999. But don't take my word for it, here are Lyft's results for 2016, 2017, and 2018, taken right from their IPO prospectus:

LYFT-2016-2018.png

Losing $911 million on sales of $2.15 billion is no small feat, yet it is one the marketplace deemed worthy of a $25 billion valuation at Lyft's $72 IPO price. With the stock peaking at $88 on the first day of trading and now fetching just $71 on day #4, the jury is out on whether the public market will accept these businesses at these prices.

The biggest problem, though, is not Lyft per se. It is that there are plenty more of these unicorns coming. Let's take a look at a list of 10 unicorns that have talked about, or already started the process, to go public in the next 12 months, along with recent private market valuations:

Uber $120B

WeWork $45B

Airbnb $30B

Palantir $20B

Pinterest $12B

Instacart $8B

Slack $7B

DoorDash $7B

Houzz $4B

Postmates $2B

That's 10 companies worth one quarter of a trillion dollars in total (more than 1% of the entire S&P 500 index) and every single one of them is losing money hand over fist. Who is going to buy all of these IPOs? What assets are going to be sold to make room for them? How many money-losing companies really should be publicly traded? Will small investors be left holding the bag this time around too? Will a deluge of cash-burning tech stocks with "good stories" mark the top of this market cycle?

I don't know the answers to these questions, but as we look out at the rest of 2019, I do think this unicorn IPO frenzy is a material risk to market sentiment. And if Lyft traded below its offer price on day #2, what does that say about everyone else who decided not to "go first"? In the end, is Lyft really that much more than a taxi service? We'll find out over the next few years, I guess.

If you are a do-it-yourself investor who is thinking about playing in these IPOs shortly after they debut, please tread carefully. Sure, there will likely be at least one or two big long-term winners mixed in, but I suspect many more will be quite disappointing.

Somebody mentioned on CNBC this week that Uber and Lyft feel a lot like Sirius and XM did in the satellite radio space. Once they reached scale they make good money, but they really are just media companies. And in the end, there was only room for one player so they merged to survive. I would say the same thing might be true for the food delivery services. Do I really need Amazon Restaurants, DoorDash, Uber Eats, Postmates, GrubHub, and Bite Squad to go along with apps from Domino's, Pizza Hut, and Papa John's? My head hurts just thinking about it.

Why I Am Selling Apple in the 180's

While technology giant Apple (AAPL) has not been a large holding at my firm for a long time, until recently my clients did have some residual shares with a very cost basis as a result of paring back their legacy positions over time. In recent days I have been selling off those shares.

For many years Apple stock has gone through cycles whereby the valuation looks a lot like a hardware company (10-12x P/E ratio) at times when sentiment is skeptical, and a higher near-market multiple (mid teens) when investors are focused on services and other higher margin, recurring revenue streams.

Last year the shares got a boost from Warren Buffett's purchases, sentiment was high, and the stock above $200 was sporting a market multiple. After an early January profit warning for Q4, the stock fell into the 140's and the iPhone's issues in emerging markets came into focus. Just two months later, the stock has regained momentum and now trades well above the level it stood before the Q4 disappointment. Why, exactly, is an interesting question.

AAPL-2019-chart.png

What is clear to me is that the iPhone problem has not been resolved in the last 60 days. The device's price continues to increase, which will serve to limit market share gains in emerging markets where household incomes are low and competing phones are close on features but priced much lower.

The notion that the iPhone will reach penetration rates globally in-line with those of its most successful regions, like North America, seems unrealistic to me. Given that the iPhone's share in the United States remains below 50%, despite it feeling as though everyone here has one, it should not be surprising that Apple has 25% market share in China, or just 1% market share in India. And Apple's decision to stop releasing unit sales figures for the iPhone only further reinforces the notion that material unit growth is over (iPhone unit sales actually peaked all the way back in 2015 at 231 million and have fallen more than 5% since) and revenue gains will be generated from pricing power, which will only serve to compress unit sales even more over time.

With iPhone having peaked, the next big thing for Apple was supposed to be recurring, high margin services revenue, but that thesis has played out only mildly in recent years. Services comprised 14% of Apple's total revenue in 2018, versus 9% five years ago. In order for investors to genuinely view Apple as a subscription company, they probably need that figure to be at least 40%, and that will take many years, if it ever happens.

We will soon hear about the company's newest services offering; a streaming video product, but that market is so crowded it is hard to see how they will be able to rival Netflix, Hulu, Prime Video, and the forthcoming Disney service. Press reports indicating that Apple CEO Tim Cook has been reading scripts and providing feedback for their shows in development should also worry investors. Should the CEO of Apple, who has no experience in the media content creation business, really be spending his time reading scripts? Doesn't he have better things to be doing? I fear the answer right now is no, which also presents a problem in terms of future innovation breakthroughs at Apple.

We are left with a company that is seeing its largest product (the iPhone is >60% of revenue) hit a wall and has little in the way of exciting new stuff in the pipeline. I do not expect the video service to be a big winner (they should have just bought Netflix or Disney instead), they have abandoned the electric car project (which seemed like an odd match for them to begin with), and more obvious areas for them to tackle (the high-end television market) have long been rumored without any results. Why Apple hasn't come out with a beautiful, premium priced all-in-one slim television device that integrates all video services seamlessly via voice control is beyond me. You can get one from Amazon at a bargain price, but the high end of the market remains untapped.

At the current price, Apple fetches about 16x times current year earnings estimates, versus the S&P 500 at around 17x. That valuation is high on a relative basis historically, and the company's future growth prospects look more muted than in prior years. The iPhone's competitive issues in emerging markets remain a problem without an easy solution (price cutting is not in Apple's DNA), but the stock market has quickly forgotten about that and sent the stock up more than 30% from the January lows. Without material multiple expansion, or significant underlying revenue growth, it is hard to see much value in Apple's shares in the 180's (or extreme downside either, to be fair), and as a result, now seems to be a solid exit point.

For a replacement, I find Facebook (FB) quite interesting. Sentiment is weak, the valuation is quite attractive relative to future growth prospects (21x this year's estimates, which are flat versus 2018 levels given the current spending cycle -- which should be temporary). As a result, over the next three to five years I would be surprised if Apple outpaced Facebook in terms of stock price appreciation.

Full Disclosure: I have recently been selling client positions in Apple and replacing them with Facebook, but positions may change at any time.

Facebook Sell-Off Hard To Ignore From A Contrarian Perspective

Shares of Facebook (FB) are dropping below $130 today as the high-flying tech sector continues a sharp correction in the market.

FB-Nov-2018.png

After such a punishing drop, it is hard for me to look away because there is a bullish fundamental story buried here, and the valuation is becoming quite undemanding.

From the business side, FB continues to offer a return on investment for small businesses that is unrivaled in the media industry. Couple that with a huge user base, that can make any successful new product launch (dating service, streaming TV, anything else they come up with later on, etc) inherently materially incremental to profits over the long term, and there are reasons to believe that the company's business model is far from broken.

From a valuation perspective, investors are getting FB's operations for about $113 per share (net of $14 per share of cash in the bank). With GAAP earnings of roughly  $7 likely for 2018, and a path to EBITDA of $30 billion in 2019, the metrics look meager on both a trailing and forward basis, despite slowing growth and falling profit margins. I understand that FB is dealing with many operational challenges, but 16x trailing twelve-month earnings? 11x next year's EBITDA, net of cash? At a certain point, the price more than reflects those challenges. It appears we have reached that point, so I cannot help but take notice.

There is still a bear case that deserves to be considered; namely that the business is permanently impaired and that revenue cannot continue to grow double digits. Essentially, the existing business is peaking and new offerings will fall flat (the new Portal hardware device?). Without growth, a near-market multiple would roughly be appropriate.

However, if the core story remains the same; rising revenue will be met with even-faster rising expenses, resulting in lower operating margins and slower profit growth, it appears the stock already more than reflects that outcome. Put another way, if GAAP earnings don't stop at $7 and instead go to $8 in 2019 and $9 in 2020, etc, the stock is not going to stay in the 120's for long.

Full Disclosure: I have begun to build FB long positions in client accounts that have seen fresh cash deposits in response to the most recent market decline and those positions could very well grow over the near to intermediate term based on market conditions

As Coastal Housing Markets Cool, 2017 IPO Redfin Is Worthy Of A Watchful Eye

For all of the business model evolutions and technology-led disruptions throughout the service economy in recent memory, the 6% realtor sales commission (a truly obscene amount for higher priced homes) for the most part has been unscathed. Tech upstarts like Redfin (RDFN) are trying to make a dent and are making progress, albeit slowly.

Public for less than 18 months after their IPO priced at $15, RDFN is using technology to save home buyers and sellers money. The company has been expanding its 1% sales commission structure rapidly, which can cut home sellers commission expense by 33% (4% vs 6%). Like Zillow (Z), RDFN also strives to offer customers ancillary services, such as mortgages.

RDFN stock had been trading pretty well, relative to the $15 issue price, up until recently:

RDFN-chart.png

The issue now is that RDFN was started in Seattle and focused initially on higher priced big cities for its lower sales commissions. The reason is pretty obvious; taking a 3% cut on a $200,000 home in Spokane is equivalent to taking a 1% cut on a $600,000 Seattle listing because each will take roughly the same labor hours. The idea that said Seattle seller would pay $36,000 to sell their house is a bit nutty, but that structure has largely survived in the industry.

Fortunately for RDFN, the coastal housing markets have been on fire, including double-digit annual gains in their home Seattle market for many years now. The result has been a strong revenue growth trend for the company, with 2018 revenue expected to top $475 million, versus just $125 million in 2014.

With those same markets now showing clear home price deceleration and inventory stockpiling, RDFN should see pressure on its near-term financial results, and likely similar headwinds for the publicly traded shares.

Long term, however, RDFN's future appears bright as it continues to expand its business across the country, taking aim at the traditional 6% sales commission structure. The company's market share reached 0.83% as of June 30th, up from 0.33% in 2014. While that figure is tiny, it shows you just how much business is out there for newer players to steal.

To be a long-term bull on RDFN, one needs to believe that over the next 10-15 years they can continue to grow market share and perhaps reach 5% penetration of a market worth tens of billions per year. The good news is that the company has enough money to try and get there. After a recent convertible debt offering, RDFN has about $300 million of net cash on their balance sheet, compared with an equity value of roughly $1.65 billion. That cash is crucial, as the company is purposely losing money now to grow quickly (cash burn has been in the $20-$30 million per year range).

It is hard to know what a normalized margin structure for RDFN could look like, and therefore assigning a fair value is not easy. With nearly $500 million in revenue and $300 million of cash, the stock does not appear materially overpriced today if one thinks they can earn 15%-20% EBITDA margins over time and therefore trade for 1.5x-2.0x annual revenue.

That said, if coastal markets continue to cool over the next few quarters, RDFN could dial back financial projections for Q4 and 2019, which would likely put pressure on the stock short-term, despite it being a long-term story for most investors. Accordingly, I think RDFN is an interesting stock to watch, especially for folks looking for growth without having to pay a huge premium for it.

The Price of "FAAAM" - 5 Tech Stocks Now Worth Over $4 Trillion

We hear a lot about the "FAANG" stocks (Facebook, Apple, Amazon, Netflix, Google/Alphabet) leading the S&P 500 higher in recent years, which is undeniably true, so I decided to take a look at a slightly modified version to see where valuations are within the group.

Below you will find data on "FAAAM" which I have coined to represent the top 5 most valuable companies in the S&P 500 today. By adding Microsoft in place of Netflix, we have a fivesome worth more than $4.1 trillion, or about 16.5% of the entire S&P 500 index ($25 trillion total value).

FAAAM-August2018.png

There are many conclusions investors can gleam from this group of tech stocks, and not everyone will agree. I will share a few of my views and feel free to chime in.

  • While not unprecedented, having such concentration within the dominant U.S. equity index means that near to intermediate returns for the market are largely correlated with large cap tech leaders. Given that none of the valuations are inexpensive, and Apple is probably the only one that looks to be no worse than fairly valued, investors relying on this group for future returns will need growth rates (in revenue and earnings) to continue at high rates for quite a while. It is hard to know whether this expectation is reasonable. For instance, will the size of these firms lead to slower growth by default, or are they dominant enough to continue to garner the lion share of the sector's growth overall?

  • At 18x EV/EBITDA, are the valuation of this group reasonable enough to expect that the stocks, on average, can generate double-digit annualized returns over, say, the next 5-10 years? If 20% annual growth rates in the underlying businesses persist, then the valuations are not likely too high, but that is a big open question. For instance, Amazon's revenue in 2018 is projected to reach $235 billion (current analyst consensus estimate). To keep growing at 20% per year, the company needs to find an incremental $50 billion of revenue every year, which equates to $1 billion every week! The stock is priced as though such an outcome is likely. What happens if revenue growth slows to 10%?

  • Of the five companies in "FAAAM" the only ones I would consider putting fresh money into, based on growth and valuation, would be Apple and Facebook. Apple's run to $1 trillion this week on the heels of a strong earnings report could signal the stock is topped out in the near-term. Facebook, however, trading down lately after ratcheting down growth expectations on their latest conference call, is really the only FAAAM stock that is down materially at all. While I am not exciting to buy any names in the group at current prices, they could very well have the best mix of untapped growth opportunities and less-than-exuberant investor sentiment.

Facebook Growth and Margin Warning Should Not Have Surprised Anyone

Shares of Facebook fell hard on Thursday after guiding investors to slower growth and falling operating margins going forward. Many FB bulls acted as this was a total shock (and obviously the stock was not reflecting the news either), but really this was bound to happen. In fact, FB had already warned that expenses would rise faster than revenue in 2018, to deal with all of the issues the company has been battling in the news lately. As a result, margin compression should not be surprising.

FB-1yr-july2018.png

Evidently investors also believed that even with 2 billion active users, the company could continue to grow revenue at 40%-plus. How that is possible when 2018 revenue will top $50 billion and user growth has slowed dramatically (there are only so many connected humans on the planet) is hard to understand. Perhaps investors see Amazon growing revenue 39% this past quarter and just assume that every high flying tech company can do the same. Amazon, however, is the exception, not the rule.

Below is a summary of Facebook's financial results, including some estimates I came up with for what 2018-2020 might look like. These are not all that different from the numbers I had been working off of for my last FB post earlier this year, but now that the company has publicly guided investors in that direction, it should be less of a speculation on my part.

FB-2018-2020.png

As you can see, GAAP free cash flow is unlikely to get much above $7 per share, even assuming the company can grow revenue by more than 100% over the next three years. Using my preferred measure, which includes stock-based compensation as though it was being paid out in cash to employees, free cash flow might struggle to get materially past $5 per share.

The big question for investors, then, is what multiple to put on such growth. The large cap tech leaders have been getting 30-40x multiples in recent years, but it is hard to know whether slowing growth rates (as these firms get so large) will crimp those valuations.

Facebook bulls would probably argue 30x that $7 figure is more than reasonable, and therefore would suggest a rebound to $210 per share (versus the current low 170's) is on the horizon over the next 6-12 months. Add back the company's cash hoard and maybe $225 is doable (the stock was already at $217 two days ago!).

More cautious investors might use 25x and prefer the $5 free cash flow figure, which would mean $125 per share, or $140 including FB's ~$40B of cash in the bank.

That leaves us with perhaps 20% downside and 30% upside depending on which camp you are in. Such a risk/reward does not exactly get me excited to build a position in the stock, but at least the shares are coming back to reality.

FB bulls are getting a good entry point and the bears have more reasons to watch from the sidelines. If I had to guess, I would give the bulls a slight edge and would not consider betting against the stock at current levels. In more specific terms, I think FB shares are more likely to see $200 again before breaking below $150 (the Cambridge Analytica bottom).

As Large Cap Tech Continues to Lead, Valuations Begin to Stretch

There is no doubt that the tech sector is where investors will find earnings growth in today's market, and many money managers are willing to pay full valuations to stack their portfolios with most, if not all, of the big name innovators.

Even though it means sometimes missing out on huge share price run-ups, I tend to buy these companies when they miss a quarter, during a market drop, or any other time when the valuations look "reasonable" (knowing full well they rarely will be cheap on an absolute basis). There was a great opportunity in Amazon (AMZN) in 2014, for instance. Last year, Alphabet (GOOG) in the low 900's looked like a good bet. Facebook (FB) briefly dipped below $150 earlier this year during a string of negative press, though I regrettably didn't pull the trigger on that one.

In fact, massive buying of these leading tech companies has resulted in the sector comprising 26% of the S&P 500 index, a level not seen since the peak of the dot-com bubble in March 2000 when tech accounted for a stunning 34% of its value. For comparison, financial stocks peaked at 20% of the S&P in 2007, before the housing collapse and no other sector has ever reached the 20% level. Amazingly, the five most valuable stocks in the index today are tech names:

Tech-Dom-SPX500.png

I have previously written about Amazon's recent share price ascent and how its price to revenue multiple is getting quite rich -- which has not stopped the stock from jumping 20% since -- and today I want to dig into Alphabet as well. While that stock around $900 last year looked like a solid GARP ("growth at a reasonable price") play last year, as it approaches $1,200 today I am a seller.

A big issue with these tech companies is their tendency to dole more and more stock, instead of cash, to employees as part of compensation packages. This allows them to produce inflated cash flow numbers, which investors/analysts then use to justify their investments/recommendations. When I value them, conversely, I use an adjusted free cash flow metric that subtracts from reported free cash flow all stock-based compensation. To me, this adjusted number more fully reflects how much cash the business is actually generating.

Below are some data points for Alphabet, from 2015 through 2018:

GOOG-Valuation.png

As you can see, stock-based compensation at Alphabet equates to roughly one-third of free cash flow. Therefore, when the investing community cites strong operating cash flow, or impressive free cash flow, they are ignoring billions in stock comp. To give you a feel for the magnitude of these numbers, my internal estimates indicate Alphabet's stock comp will come within striking distance of $10 billion in 2018. It is more than just rounding error.

Despite strong sales growth (the consensus view calls for 20% per year, on average, for 2018 and 2019), investors are paying quite a big price for the stock at current prices. At $1,180 each, GOOG fetches just shy of 50x times my 2018 free cash flow estimate, less stock-based comp, of $25 per share.

As an alternative, using EV/EBITDA, which includes stock comp and gives the company full credit for their large net cash position, the multiple is an unattractive 18x (using my 2018 EBITDA estimate of $41 billion).

While there will always be investors willing to pay up for growth, the main thesis in recent years ("the stocks are not expensive") might be harder to justify now. As a result, I think it is more important than ever to be opportunistic and focus on taking advantage of near-term pullbacks, rather than buying the biggest U.S. companies indiscriminately just because they have performed so well in recent years.

Full Disclosure: I have been selling shares of GOOG this week

Big Question Mark for Facebook: Profit Margins (Not Advertiser Behavior or User Engagement)

There has been a lot of commentary in recent days about how user engagement will change, if at all, in the wake of Facebook's user data privacy hiccups, as well as how advertisers will react and whether they will shift dollars to other social media platforms. I actually do not think either one of those metrics will materially change in the coming months. What is more important in my eyes is how Facebook's margin structure could be permanently different in 2018 and beyond.

Sure, there will be some users who stop using Facebook and blame the recent issues, but those users were probably not using the platform much to begin with, and as with most things, people tend to have a short memory. Diners typically return to restaurant chains even after illness outbreaks and shoppers did not abandon Target or Home Depot after massive credit card data breaches.

I also would not expect material advertiser migration. It reminds me of the NFL ratings drama over the last season or two of professional football. Television ratings have declined, in part due to an abundance of games (Monday, Thursday, Sunday), more viewing options that are not easily tracked by Nielsen (streaming services, mobile apps, etc), and more competition for eyeballs (Netflix, etc), but the NFL is quick to point out that despite lower ratings, NFL telecasts still get more viewers than most every other television program. As a result, if you want to allocate ad dollars to TV, the NFL will remain one of the best ways of doing so.

The same should be true with Facebook. If both the user base and the average time per day spent on the app drop a few percentage points, Facebook will not lose its spot as one of the best ways to reach consumers on social media.

The bigger question from an investor standpoint is what Facebook's margin structure looks like going forward. More specifically, how much expenses are going to rise and whether those costs are on-time or permanent. I suspect they will rise dramatically and will be permanent. After all, up until recently the company really just built the platform, turned it on, and let anybody do pretty much whatever they wanted with users and their data. It is obvious now that in order to maintain trust and their dominant position in the marketplace, they are going to have to [police the platform on an ongoing basis and limit the exposure to bad actors. This will cost money, lots of it, and will not bring in any incremental revenue. As a result, profit margins will fall and stay there, in my view.

This is critical for investors because the stock's massive run-up in recent years has been due to a growing user base leveraging a scalable cost base. Facebook's EBITDA margins grew from 48% in 2013 to 57% in 2017, and the stock price more than tripled. That margin expansion is likely to reverse beginning this year, to what extent remains unknown. Could those 9 points of margin leverage be recaptured by rising expenses of running the platform? I don't see why not.

In that scenario, investors may no longer be willing to pay 10-11x forward 12-month projected revenue for the stock, which has been the recent range. If that metric instead drops to 8x (~$149 per share), it will have implications for the stock (currently fetching $160) even if advertisers and users stay completely engaged with the platform.

Full Disclosure: No position in FB at the time of writing, but that may change at any time