Facebook's Enormous Opportunity
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The talk surrounding Facebook (NASDAQ: FB) has been quite negative. But if we tune in to the details and cancel out the noise, we might see things differently. In fact, we might even begin to appreciate Facebook's enormous opportunity.
To discuss such a controversial stock, it's important to eliminate any biases that could prevent us from thinking clearly. We often over weigh information that comes easily to mind (availability bias). So, let's keep the availability bias in check. Chances are, all the negative chatter surrounding Facebook could distort our attitude toward the stock.
Facebook is the second-most visited website in the world
. . . second only to Google (NASDAQ: GOOG), of course.
Based on some info from Facebook's Q2 earnings release:
- 552 million people use Facebook every day
- 995 million people use Facebook at least once a month
These are some enormous numbers. And it's the foundation to Facebook's enormous opportunity.
Not only is Facebook a close runner up in web traffic to Google, they also have similar business models. This gives us a chance to gain some insights by comparing their advertising revenue:
Despite Facebook's web traffic as a close runner up to Google, Facebook's revenue falls far behind. This presents both a problem and an opportunity.
Problem: Facebook is not near as efficient at converting traffic to sales as Google is.
Opportunity: Facebook has plenty of room for improvement. If Facebook could efficiently monetize its traffic only half as effectively as Google, Facebook's revenue would soar higher.
The Google/Facebook comparison highlights yet another problem/opportunity.
Problem: Facebook has not yet taken action to monetize its mobile platform.
Opportunity: Monetization of mobile browsing represents yet another significant opportunity for Facebook. Why? Because more than half of Facebook's 1 billion monthly active users (MAUs) are mobile active users (mobile MAUs).
I doubt Facebook will ignore this opportunity. Its facing increasingly more pressure to monetize its mobile platform because it is also its fastest growing platform:
chart source: Facebook Investor Relations Q2 earnings slides
Year over year growth from Q2 2011 to Q2 2012 for mobile MAUs was 67%. Compare this to Facebook's overall revenue growth for the same period: 32%. You can bet that Facebook is working hard to monetize its mobile platform.
Facebook could expand its service offerings
There are several ways Facebook could easily expand its service offerings without compromising its core business. Let's consider just a few: search and payments.
Search - 552 million people already use Facebook every single day, why should we have to visit Google's site to find out what day of the week Christmas falls on when we are talking about it on Facebook to our friends? Imagine the convenience of having search built into Facebook.
Payments - Payments represent a huge market. It is lucrative enough that Google even entered the payment business in 2006 with Google Checkout (Source: BBC News). Online payments are all the rave lately. John Donahoe, CEO of eBay (NASDAQ: EBAY), expects "eBay and PayPal mobile to each transact $10 billion in volume in 2012 -- that's more than double 2011, a staggering surge in mobile shopping and payments on devices that did not exist just a few years ago" (Source: Starbucks Q2 financial release). Keep in mind, he is only referring to the mobile side of the house here. And don't forget about Twitter founder Jack Dorsey's Square--a payment service for small businesses that is causing some serious disruption to the payment industry. In fact, it's gained enough attention that Starbucks (NASDAQ: SBUX) has just announced an agreement with Square to adopt their technology for its credit and debit transactions by this fall. Starbucks CEO, Howard Schultz, was so enthusiastic about Square that he was the one that reached out to Dorsey. It didn't take long for Schultz to realize Square was what Starbucks needed: "Once Jack and I sat down, it was very obvious," Schultz said (see the full Square/Starbucks story here at CNN Money).
Oh, and just a few other things to consider:
- Facebook has $4 per share in cash - Thanks to Facebook's extravagant IPO, Facebook has plenty of cash on hand. With $4 billion, Facebook should be able to afford whatever strategic moves Mark Zuckerberg thinks Facebook needs to take.
- Facebook is still a young company - Google has been around quite a while. It's had time to figure out how to make money. Facebook only recently went public. Over the past decade their primary focus was user growth. Monetization is a major strategic shift for Facebook. Chances are, Facebook has plenty of room to improve its advertising efficiency.
- Facebook already has the market share - In most industries the question upper management needs to ask is, "how can we gain market share?" But Facebook is in an unusual circumstance. Facebook already has the market share (995 million MAUs, 552 million DAUs, and 543 million mobile MAUs), now it just needs to make more efficient use of its market share by increasing advertising efficiency and monetizing mobile browsing. Any increase in market share along the way or any new service offerings are just a bonus!
- The network affect works in Facebook's favor - The nice thing about platforms like Facebook is that the more people use Facebook, the more useful it becomes. In other words, I'm not going to use some random service to make connections because no one would be there. Let's face it, Google Plus is a ghost town. Ghost towns are no fun when it comes to networking. With over 1 billion monthly active users on Facebook, the network affect will continue to work in Facebook's favor, giving it a wide moat.
What does all this mean?
There are many times that growth has defied gravity in the last decade--it's a 21st century phenomenon. Consider the first line in Amazon's (NASDAQ: AMZN) 1997 annual letter to shareholders: "Amazon.com passed many milestones in 1997: by year-end, we had served more than 1.5 million customers, yielding 838% revenue growth to $147.8 million, and extended our market leadership despite aggressive competitive entry" (Source: SEC Filings). Little did we know that 1997 was just the beginning for Amazon. And the growth has not ended. Today it trades at a P/E above 200 with plenty of growth expected to come.
Despite all the negative chatter, let's not forget that Facebook is a great company with enormous opportunity. Trading around $20 a share, it's time we take another look at Facebook--bias free. Perhaps it's even undervalued.
DanielSparks has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Facebook, Google, and Starbucks. Motley Fool newsletter services recommend Amazon.com, eBay, Facebook, Google, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.