Profiting from Facebook’s Fallout

Three years ago, I observed Facebook’s startlingly fast ascension to the tenth largest publicly traded company in the United States (“The $245 Billion Dollar Experiment”):

“In a certain sense this feels like some sort of giant experiment in economic rationality, in that Facebook has a pretty unusual business model. It does not make anything that you can touch or see.”

I went on to say:

“However, from a broader perspective it can be argued that Facebook is a company that enables almost everything, and gets paid (indirectly) by almost everybody. Long removed from its origins as a website to check out pictures of fellow college students, it now provides a forum to facilitate a wide variety of human interaction.”

I concluded by noting that if no rival to Facebook emerged to compete for its advertising dollars, “Facebook may have a clear path to moving further up the list in fairly short order.”

That’s exactly what happened.

Even after its quick 10% share price decline over the past two weeks after the company acknowledged a massive security breach, its current market capitalization of $480 billion – nearly twice its value three years ago – places it into the top five of the S&P 500 Index.

The day after Facebook CEO Mark Zuckerberg concluded his congressional testimony, I logged onto Facebook and was greeted with a too-big-to-miss message offering me (and all of its other users) the opportunity to change the privacy settings on my account to limit the personal data it collects on me.

I made a few tweaks to my account, but since I like having targeted ads presented to me for items I might want to buy I didn’t opt out altogether. However, I know many friends, co-workers and relatives that either opted out completely or terminated their accounts.

It’s too soon to know what the economic damage will be to Facebook in terms of future advertising revenue. However, the company is so closely followed that obtaining fairly accurate estimates of its ad revenue will not be hard to do.

Getting the Boot

What will be considerably more difficult – and potentially much more profitable – is predicting which merchants will be affected the most by the decline in the size of Facebook’s pool of marketing data on its users. I may not buy that pair of boots LL Bean just showed me on Facebook, but reminding me that I want them may result in my stopping at their local store to pick them up next week.

For those Facebook users who will never see that ad again but still need a pair of boots, where will that transaction end up happening? Nobody knows, but figuring it out could be lucrative.

Multiply that dynamic by whatever fraction of Facebooks 2.2 billion active users choose to change their marketing preferences, and you have a huge, but unknown, amount of consumer dollars that will behave differently in the future than it has in the recent past.

Only an expert can figure all this out, so don’t try it yourself.

My colleague, Linda McDonough, is our resident retail sector analyst. She pores over reams of corporate statements to discern which way the tide is turning and converts those insights into action portfolio advice.

Just last week, Linda recommended buying puts on three well known retail names that she believes will come out on the short end of the stick. That last two puts Linda closed out generated gains of 65% and 47% in a matter of weeks, so I’m excited to see how these new trades of hers turn out.

Click HERE if you’d like to know more about how Linda comes up with these huge profit opportunities.

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Yossi Krispin

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