Facebook's Magical Revenue Stream and Outlook

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

Being able to see the future through the dark cloud of uncertainty is one of the most prized assets an investor can have. A second is sticking to your convictions in the face of public sentiment against you; as much like the animal kingdom we easily succumb to herd mentality, both on the upside and downside.

I recently read a well written article (though I might not agree with it) that questioned just where Facebook’s (NASDAQ: FB) magical revenue stream might come from, and that at current prices it was fairly valued.

The article made the following points.

  1. Mobile already accounts for 23% of Facebook’s revenues, and 65% of clients advertise on their mobile platform, thus there is less growth to come from mobile than previously thought.
  2. Social graph (Facebook’s new social search engine) is not expected to contribute to the bottom line any time soon according to their CFO. Revenue from gifts (where you are able to send a gift to someone for let’s say their birthday) are small, and payment revenues are declining.
  3. Most new users will come from developing nations and thus will produce little in ad revenue.

So, allow me to address these points to provide a contrarian viewpoint, and then discuss the magical revenue stream that will likely be approaching soon.

  1. Mobile isn’t even close to being monetized, even if 65% of clients already advertise in the space, both Facebook and Google  (NASDAQ: GOOG) (currently the mobile leader in market-share with their Android system) continue to tinker every which way possible to monetize the space. When Google first came public many investors doubted their ability to monetize their massive traffic. Google obviously proved the doubters wrong with adwords. Of course there are still major hurdles in monetzing mobile (screen size, security, etc.) but based on trends in humanity, businesses will figure out a way. Mobile traffic is cheap compared to desktop traffic today (as it should be) … eventually it will catch-up, and possibly, just possibly, with location based selling, surpass desktop in price.  I’m sure we are years away from this though.
  2. Social graph/ search engines. Yes, Facebook is not Google yet. Most Facebook users don’t even know about this feature, much less have tried it. Is it refined? Nope. Google has a huge moat in search, even as Facebook uses Microsoft’s Bing for results they don’t generate. There is no way a CFO can come out and say he’s wild about the possibility of their new beta product generating lots of revenue. The fact is Facebook will make improvements here and has a captive user base visiting their site multiple times per day ...
  3. Point agreed with. However, developing nations will be getting more and more wealthy via globalization. Five, ten years from now, these will be much bigger markets than they are now. Facebook’s marginal costs per added user approach zero, so it costs shareholders nothing to wait to for this. Facebook is not necessarily a short term investment.

Magical revenues

I’ve said it before, and I’ll say it again, Facebook in the future will generate billions a year in gambling revenues. They have already put slots and bingo on their British site.

When (not if) the revenue hungry government of the United States finally legalizes Internet poker, should Facebook choose to, they could easily drive a huge number of new players to what is considered a social game. Organize a low stakes online tourney amongst your friends, or join a multi-million person online tourney with lottery like payouts for first place, the potential here is massive, and the income passive.

Conclusion

I really have to give Mark Zuckerberg credit for not worrying about short term profits Wall Street so often demands, and investing in the future of his company (as he promised pre-IPO.) The company's biggest asset, the ubiquity of use of its 1 billion and growing user base is the golden goose, to be treated with the gentlest of hands. With the minor public relations challenge they had with Instagram notwithstanding, and the rumored video ads coming, so far I give Zuck and co. high marks for their treatment of their prized goose.

And a million people can tell me I'm off my rocker for my vision of the future of Facebook Poker; unless I hear a very persuasive argument from Zuckerberg himself against it, I'll see your bet and raise you. My money’s already on the table. 


margiecfl has long positions in Google and Facebook. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. 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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