Could Facebook Become the Next Amazon?

By Moustafa El Zanaty - August 7, 2012 | Tickers: AMZN, FB, ZNGA | 0 Comments

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A list of the most hated companies in America might include the likes of BP, Phillip Morris, any number of banks and many airlines, but the list can’t be complete these days without Facebook (NASDAQ: FB).  If any company this year has been used to exemplify the evil of Wall Street, our loss of privacy and the creation of an apparent bubble, Facebook is it.  If Facebook’s quarterly earnings results were a movie, I would have walked out a month ago.  It was apparent that barring some miracle the social network was going to get hammered in its first earnings report.   The miracle didn’t materialize and its stock plunged to a new all time low.  We knew this would happen, as it was touted so highly before its IPO, and it was a company that even those who had never purchased shares in anything before could say they had used for many hours on end.  What we are left with is a company whose business model and market have changed very little since the IPO.  So, to look at the company, we must look at its fundamentals and forget for a moment its share price.  As most investors turn their backs on Facebook, an opportunity emerges to enter into a company that has revolutionized the social media industry and has the opportunity to keep doing it.

Even with its recent drop in share price, Facebook is still richly valued today for what it is supposed to do moving forward.  Before diving into the business though, it must be said that generally when a company is shunned by Wall Street and hated by the public at large, yet nothing in its fundamental business has changed, there is usually a buying opportunity.  Unlike in the last major tech bubble, Facebook went public after it had already been a proven business with proven revenue streams.  When Amazon (NASDAQ: AMZN) went public with the idea of revolutionizing the way we shop, it had a lot longer bridge to cross to profitability and acceptance then does Facebook.  Amazon is also richly valued but has continued to beat the market and impress investors with its ability to get into a myriad of interrelated businesses.  It sells DVDS, e-readers and hosts major corporate web sites.  The main issue with Facebook is not its present revenue streams but how it will monetize the mobile web and create new and innovative products and services moving forward.  It’s hard to imagine a business with 900 million plus users, most of whom use Facebook almost daily, that has created a culture of innovation yet won't be able to monetize its user base. 

What is unique to Facebook is the way it taps into the human need to socialize with others.  We enjoying watching movies our friends recommend over those of an unknown critic, we like going places our friends say were a good time, and we like purchasing stuff our friends get and say is cool.  These are all things Facebook monitors now through its system of likes, logging in to your FB account from third party websites and its collection of user data.  Though it has often come under fire for its privacy policies, Facebook knows more about its users than any other company, government or kingdom that has ever existed.   This is a treasure trove for advertisers, and though Facebook has had some high profile advertisers publicly state they are not sure how their investments have paid off, they have grown their bottom line year after year.  No company is hiccup free, and Facebook has had a bad case since going public, but none of these hiccups are drastic enough to change its business. 

As a long term investor, I see a huge potential for Facebook to become a multi bagger moving forward, though the short term volatility will test anyone’s patience.  Zygna (NASDAQ: ZNGA) has had a similar fate to Facebook as its share price has been slammed since going public.  Zygna has been pursuing ventures outside of Facebook’s platform, though it still generates most of its revenues from its Facebook partnership.  It’s possible moving forward that Zygna eventually moves away from Facebook’s platform completely, and this may affect the bottom line for Facebook.  I don't recommend buying into Facebook until after August 19^th, when the insider share lock up ends and a good amount of shares are slated to hit the market.  After this though, I see an opportunity to slowly enter the company.   The main reason I see for investing in Facebook is its potential to monetize a wide range of businesses that most people don`t see as opportunities today, some that haven’t even been created yet.   A company with a culture of innovation will continue to create new and novel products and services that can be tied into the platform, similar to what we have seen with Amazon.  Facebook today is an online social media company, but moving forward we could see Facebook in a wide range of businesses.  One example is the rise of mobile payments and mobile to mobile payments.  This business is growing very fast, and as the technology allows more and more people to make payments through cell phones we could see a Facebook like PayPal.  With innovations like the Google wallet and Facebook’s improving mobile app, we could see Facebook being a gateway for people to not only see what their friends like, but purchase it and finish the transaction over the Facebook platform.  This would not only be a profit driver but would only improve the incredible amount of valuable data Facebook collects.  These ideas, along with the stuff that only the brains at Facebook can think up, are all potential opportunities for it to make money.  I see the company as a business that will look back on its early days as a public company and wonder how the market was so wrong about it.                  

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