Facebook's Growth Drivers
Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Facebook (NASDAQ: FB) has some very big growth prospects that few other technology companies can rival at scale. Based on its huge and global installed audience, Facebook can market and monetize new products and services over the long-run as well. Facebook's CEO seems to be very good at executing the laid-out strategies, as evidenced by the company's transition to mobile. Some of the company's newer pursuits provide immense growth potential by themselves and can possibly turn into very lucrative revenue streams down the road.
Future Growth Drivers for Facebook:
1. Facebook Home
Facebook Home is the series of apps that effectively takes over the front screen of the mobile device. The Facebook Home experience effectively steals some of the thunder of Google (NASDAQ: GOOG) in its own Android OS. The Home function will be the first point of contact for users for all sorts of Facebook-based communication on mobile. As a result, users of Home will be effectively spending even more time on Facebook’s platform than ever before which translates into much more enhanced levels of engagement, and more monetization opportunities through ad impressions.
The smartphone marketplace is expected to double up in size from current levels by 2016 and reach 1.4 billion units a year, according to IDC. Since a majority of smartphone sales are on the Android OS, Facebook Home can see very high-levels of customer adoption.
Home is a great move towards stimulating user engagement and a highly social and engaged audience is a great asset for Facebook, as it will be able to earn more revenues from mobile ad placements.
2. Graph Search
Another untapped and potential revenue stream for Facebook is the Graph Search tool. Facebook's management reiterated their stance towards graph search and stated that the project is still in data-collection mode and is for the long-haul. Once the Graph Search incorporates more data using the social components of Facebook's social network the company can expect to see much larger and wider consumer adoption of this tool.
The external search is being powered by Microsoft's (NASDAQ: MSFT) Bing, which makes the entire Graph Search function more user-friendly. Microsoft has managed to gain some market share in the search engine marketplace in the U.S. However, Microsoft's still holds second place and controls only 16.9% as of March-2013, which is still well below Google which controls more than 67%, according to comScore.
Facebook's pairing up with Microsoft for the Graph Search tool makes a lot of business sense as well. The market for paid search advertising is expected to grow to $48.8 billion in 2013, which is bigger than the display advertising market which is expected to grow to $39.8 billion, according to ZenithOptimedia. Facebook's monetization opportunities stemming from the growth in online advertising is substantial.
The very popular photo-sharing app, Instagram had roughly 22 million users when Facebook acquired it in 2012. And now Instagram has more than 100 million monthly visitors to its site. Instagram has become very popular in particular with younger age demographics, and has evolved into a social network on its own. And Facebook hasn’t even started monetizing yet.
According to comScore, Facebook leads the way with the top app audience ranking in terms of engagement on mobile apps. Instagram accounts for 3% of all time spent on apps and Facebook accounts for ~23% time spent on apps. It is widely expected that advertisements on Instagram are right around the corner for Facebook. And with global smartphone penetration rapidly rising, it wouldn't be surprising at all to see Instagram grow its current user base by 2x-3x in the next few years. As Instagram has become very popular on its own rights, the monetization opportunities from the app are reasonably high.
4. Gifts and e-Commerce
Facebook's Gifts initiative hasn't gotten off the ground yet. But the company's user base of more than 1.1 billion and small business pages of more than 16 million allows the company to pursue newer business opportunities especially on the e-Commerce side. Once Facebook manages to sign up more merchants on its platform, it can potentially turn into a marketplaces business like eBay (NASDAQ: EBAY).
The world's largest online marketplace, eBay was responsible for enabling roughly $49 billion worth of transactions in the last quarter, and eBay's portion of the revenues (i.e. the take rate) was 7.7%. Facebook can transform the Gifts business into a potential Marketplaces business as the company already knows a lot about the personal information and likes etc. of its users. Facebook can earn a lot of revenues from this model via a take-rate model in line with eBay.
The CEO is very keen to invest in the company’s major growth opportunities to deliver products at scale including Home and Graph Search and the company is in pole position to do so, relative to competitors. And Mark Zuckerberg is fully focused on delivering on these big investments of the company. The company doesn't generate much revenue from each of these potential revenue streams. However, Facebook is steadily positioning itself very well to maximize long term returns for investors.
After the world's most hyped IPO turned out to be a dud, many investors don't even want to think about shares of Facebook. But there are things every investor needs to know about this revolutionary company. The Motley Fool's newest premium research report shows that there's a lot more to Facebook than meets the eye. Read up on whether there is anything to "like" about it today to determine if Facebook deserves a place in your portfolio. Access your report by clicking here.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends eBay, Facebook, and Google. The Motley Fool owns shares of eBay, Facebook, Google, and Microsoft. 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!