Could This Social Media Giant Make Billions From E-Commerce?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You probably know Piper Jaffray's Gene Munster as the esteemed analyst who is very bullish on the prospects of an Apple TV, but he was making a somewhat surprising prediction about Facebook (NASDAQ: FB) last week on Bloomberg TV.
On the "Bloomberg West" program, Munster discussed the social network's prospects in the field of e-commerce, which we've covered quite a bit recently (see how Facebook users can now 'gift' Apple iTunes content). As noted by the show's hosts, Munster and his team issued a new report that states he believes Facebook can make "$10 billion in commerce-related revenue by 2015." On the prediction, Munster defines commerce-related revenue as the "ability to create demand offline," mentioning that "Google (NASDAQ: GOOG) is the best example" in this regard.
When explaining his reasoning behind this bullish forecast, the noted analyst says that a "big piece" of the puzzle is a 'Want' button - similar to the 'Like button - that Facebook "has tested [...] with six retailers," noting that "there've been some reports out of the UK from their Head of Retailing that they're going to go full force with the 'Want' button in 2013."
When asked if investors should start to group Facebook with e-retailers like Amazon.com (NASDAQ: AMZN) and eBay (NASDAQ: EBAY), Munster didn't go as far as some would think, however, having this to say:
"I think that it's still going to be an advertising company for the next couple years; I think that the commerce part will slowly layer into it. We kind of think of this longer term to be 30 or 40 percent of the business - the commerce side of it - so still more than 50 percent will be more ad-based."
Looking at Facebook's last earnings results, the company did rather well on the advertising side, coming in with Q3 revenues of $1.26 billion versus $1.23 billion estimates, and a 36% growth in YOY advertising revenues, up eight percentage points from Q2. Mobile is especially important to the company, as sales in this arena now make up one-seventh of the total advertising dollars.
On the subject, Munster believes that "the stock didn't react as much as you would expect it, because of this lock up [...] at the end of the day [...] they've had great traction with mobile," adding that despite the fact "they've been really saturating your News Feed with these [sponsored] ads [...] surprisingly, the usage really hasn't been impacted [...] and that's really encouraging for investors."
To conclude, Munster mentioned that he feels the "heavy lifting" of the e-commerce expansion will be done by third-party developers, leaving Facebook to "collect their paychecks."
While it remains to be seen just how prosperous a potential 'Want' button would be for Mark Zuckerberg and Co., Munster makes some key points, especially in regard to just how much Facebook will rely on this area of their business. We're encouraged by the company's potential ability to grow its mobile advertising over the next few years as well, so investors' concerns over a lack of revenue diversification can be softened.
While Facebook may have finally found a perfect compliment to its ad-based business with e-commerce, investors would be wise to consider the stock’s valuation before buying in. At its current market price, shares of FB trade at a forward earnings valuation of 41.6X, which is surprisingly below Amazon (137.5X) and LinkedIn (NYSE: LNKD) (86.1X), but above eBay (19.0X) and Google (15.0X).
Now, all of this talk of forward-looking valuation metrics are poppycock unless we look at the growth estimates in particular; the sell-side is bullish on Facebook’s ability to generate EPS expansion over the next half-decade. Five-year estimates predict annual bottom line growth of 26-27% a year for the social media company, which is far above Google (15.7%) and eBay (14.0%), but below Amazon (34.1%) and LinkedIn (72.5%) significantly, which is understandable, given the latter duo’s valuation premium.
It’s notable that these figures do not include Munster’s standout $10 billion revenue estimate, which could raise estimated EPS growth to the 40-45% range while pushing the company’s valuation down significantly. At current levels, we’d take the plunge with Facebook, as it has the chance to become one of the most diversified tech companies from a revenue standpoint, and its social aspect may give it an advantage over e-commerce competitors like Amazon and eBay. On the flip side, social media peers LinkedIn and Google don’t yet have any type of e-commerce system embedded in their platforms yet, giving Facebook the advantage on the monetization front.
To continue reading about the social media giant, check out yet another way how Facebook could make billions with its Connect platform. Enjoy.
This article is written by Jake Mann and edited by Meena Krishnamsetty. Meena has a long position in Google. The Motley Fool owns shares of Amazon.com, Facebook, Google, and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, eBay, Facebook, Google, and LinkedIn. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!