- Users spend 456 billion hours on Facebook per year. The time spent working in the U.S. per year is 246 billion hours.
- Scientific research has shown that Facebook is addictive and it’s a habit that’s very hard to rid yourself of.
- At a valuation of 36, addiction makes Facebook one of the best risk reward plays out there.
In the book Barbarians at the Gate, Buffett said this: “I’ll tell you why I like the cigarette business, it costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”
In one sentence, Buffett described the best business model there can be and the best business to own. A big part of Berkshire’s portfolio has been structured in a similar, addictive fashion. We could say that See’s Candy, Dairy Queen, and, of course, Coca Cola (NYSE: KO) base their business model on an addiction to sugar. Buffett is happy to own KO because, to quote:
“One thing that people don’t understand is one thing that makes this product worth tens and tens of billions of dollars is one simple fact about really all colas, but we will call it Coca-Cola for the moment. It happens to be a name that I like. Cola has no taste memory. You can drink one of these at 9 o’clock, 10 o’clock, 1 o’clock and 5 o’clock. The one at 5 o’clock will taste as good to you as the one you drank early in the morning, you can’t do that with Cream Soda, Root Beer, Orange, Grape. All of those things accumulate on you.”
Buffett loves to own businesses that are addictive and will lead to multiple consumptions over one day. He never invested in the tobacco industry because he wants to be the nice guy, but I’m sure he regrets it.
This made me think about another addictive business, or at least it seems to me that those who use it are addicted to it, Facebook (NASDAQ: FB). Today, we’ll analyze whether Facebook has the best business model out there in which it creates addiction with no physical health damage and manages to constantly monetize more and more of that addiction.
Facebook has managed to have 1.3 billion people using its social media platform on a daily basis. That’s about 40% of all the people that have internet access. Further, the numbers seem extremely stable and continue to grow.
The most stunning number is the average number of minutes that FB users spend on its platforms every day, about 50 minutes, not including WhatsApp. With such growth and engagement, it isn’t surprising that FB’s revenues are skyrocketing.
The main fear with growth stocks investors usually have is whether the growth will continue. If FB users spend 50 minutes of their time per day on FB and we can show that FB is addictive, then FB is probably the best business model out there.
Is Facebook Addictive?
According to Nir Eyal, Stanford Graduate School of Business lecturer, Facebook is addictive because it targets the time when we are bored. As being bored is painful, Facebook provides the solution.
Michigan State University also showed that this solution over time leads to a pleasant feeling when users are exposed to Facebook and the first link to our mind to solve the cravings of our mind. Thus, exposure to Facebook becomes a learned response—such as when children learn misbehavior earns them attention, or when dogs learn going to the bathroom outside earns them a treat—and learned responses are hard to break, said MSU researcher Allison Eden.
Eden did a second study where she measured participants’ cravings for Facebook. Apart from the initial boredom solution, in the later stages, Facebook users struggle with regulating their use of social media, which leads to guilt and bad feelings when people turn again to Facebook. She calls it the “cycle of self-regulatory failure.”
I don’t think we need scientific research to tell us that Facebook is addictive. It’s enough to look at the behavior of frequent users. With an army of 1.4 billion addicted users, and a plethora of ads, Facebook might really be the best business model out there, the tobacco of the 21st century.
If you’ve been wondering whether or not you should buy Facebook, with such an addictive business model, that’s extremely difficult to get rid of, where the time spent on it is huge, and where there are many more monetization opportunities in the future, the current trailing price to earnings ratio of 36 might really look like a bargain.
It might be smart to ride the wave until some governments start banning it or limiting its usage. Just think of it, the 50 minutes per day times 1.4 billion users amounts to 424 billion hours per year. That is almost double the number of hours worked by full-time and part-time employees in the U.S. (246 billion hours).
Until the world realizes that Facebook isn’t bringing people closer together, but instead wasting their time by creating a futile addiction, the best thing to do might be to simply invest in Facebook.
The problem for Facebook users is that it’s very difficult to stop using Facebook and the more one uses it, the more difficult it is to leave it. This also means Facebook has a huge moat which is something investors look for. So apart from some short term fluctuations in revenue due to possible economic recessions, I really don’t see many risks related to investing in Facebook.