Massive Risk, Massive Reward

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Facebook's (NASDAQ: FB) stock is off almost 50% from its IPO, having rebounded a little from a low of $17 per share.  That being said, let's take a look at the company's strengths, weaknesses, opportunties, and threats, or what we at the Motley Fool refer to as a SWOT analysis.

Strengths

  • Facebook has a huge moat in terms of its ubiquity of use. We all use Facebook, because our friends do.  Friendster fell to Myspace, which in turn fell to Facebook. Facebook has one billion users and growing.  Neither of the priorly two mentioned companies had anywhere close to that.
  • Absolutely amazing technology. The vast amount of a real-time data Facebook is handling would overwhelm just about any other corporation. Read any tech journal about the architecture Facebook employs and their cutting edge computer science, and Facebook will earn the highest of marks.
  • The technology prowess mentioned above also acts as a huge moat, as it is incredibly difficult to replicate.
  • Vast amounts of our own personalized data. The company knows exactly what we like, where are we have been, and who we know.
  • The ability for advertisers to only pay to reach customers of a specific demographic.  Facebook knows exactly who we are.  If you're 18 years old and are witnessing a Depends Diaper commercial on the site, you have likely lied about your age.
  • A positive relationship with behometh Microsoft (NASDAQ: MSFT), which still owns 1.6% of the company.
  • Zuckerberg truly cares about changing the world and connecting it.

Weaknesses

  • Must be incredibly judicious in terms of rolling out ads for fear of alienating its user base, lest they move over to Facebook's largest competitor, Google Plus.
  • Many employees hired before the IPO came there almost strictly for the stock options.  Many of these options are currently under water, making the new employees ripe for the pickings of other technology firms.
  • Facebook concentrated far too long on the desktop version of the site, and thus is behind on mobile.  As consumers migrate in that direction, the company has been unable to monetize them.
  • Paid $1B for Instagram, a company with no profits or revenues, just an actively growing user base.  I guess Zuckerberg doesn't exactly approach takeovers with the same shrewdness as Warren Buffet.
  • Companies like GM (NYSE: GM) have pulled advertising from the site, not finding a return on investment.
  • High expectations built into the stock price could mean the price would drop dramatically on bad news.

Opportunities

  • Has already put bingo and slot machines on the British version of the site.  Facebook has the opportunity in the future to derive substantial amounts of high margin revenues from gambling.  In fact, if the U.S. were to legalize poker, it could become the world's largest poker site.
  • Many analysts are more bullish on Facebook's prospects to monetize mobile.  If they ever figure out how, the stock would blow through the roof. 
  • One billion users.  One billion.  The potential to monetize these users is so vast, that every added penny per person adds a substantial amount to bottom line profits.  Facebook's greatest strength is  its greatest opportunity.
  • A search engine. Though there was talk of Microsoft selling off Bing to the company, it seems more likely that Facebook will develop its own social search engine using our own personalized data and that of our friends to show different results for each user.  Though not a cheap endeavor to undertake, it has the potential to take away traffic from Google, and thus add substantial profits to Facebook's bottom line.
  • China. The Great Firewall currently does not offer Facebook access to Chinese residents.  That's another 1 billion plus people Facebook has yet to be able to reach.

Threats

  • The move to mobile.  Facebook paid $1B for Instagram in part because they saw the potential for a mass migration away from the web.  What other competitors might come up with a product which might bypass this social behometh?
  • Google. Facebook is firmly within Google's (NASDAQ: GOOG) crosshairs.  Google Plus has many capabilities which Facebook still does not offer, including such things as live hangouts.  If Facebook was to alienate its user base with too much advertising, bad press or whatever, Google Plus is there waiting for them with open arms.
  • Zuckerberg cares much more about changing the world for the better, and thus might not be the best custodian of shareholder money.
  • Government intervention/ lawsuits. It is conceivable that Facebook could be deemed a monopoly in social media, and sued in the same was Google was regarding search. 

Bottom Line

On the whole I believe that Facebook is worthy of investing my money in.  I simply believe that the up side at this point outweighs the downside despite the high valuation currently ascribed to the stock.  If you have an opinion, feel free to leave a comment below.


margiecfl is long GOOG, MSFT, and FB. The Motley Fool owns shares of Facebook, Google, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, General Motors Company, 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!

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