When Did Facebook Become the Next Google?

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

Our collective memory as investors seems to be about as long as a Super Bowl ad these days.  We often continue to hold assumptions that only a few years ago were proven false. Ideas seem to spread like the flu, as we have constant access to information which is very rarely unique. We only need to turn back the clock less than a decade, when Google (NASDAQ: GOOG) first went public. At the time, very few people felt that a successful company could be built solely on online advertising revenues. The same type of discussion is going on with Facebook (NASDAQ: FB) as they begin to monetize their own advertising business. Though the companies are very different, they also draw some strong similarities.

Facebook is growing

Facebook is one of the most widely used websites in the world, and has continued to increase its user base even as it has struggled as a public company.  Even after a recent run up, Facebook is still down since its IPO, and has been the target of consistent negative press and investor malaise.  The recent release of their "Graph Search" function, which was generally regarded as unimpressive by the investing community, did not help improve the share price over the last four weeks. The most recent earnings report demonstrated not only that Facebook is capable of growing mobile revenue, but has committed to increasing spending to capture more customers and future ad revenues.  

These are all very positive trends, but it seemed most analysts focused more on the increased customer acquisition costs, and the companies unproven ability to monetize its over one billion users.   What is very apparent is that Facebook is not only a growth stock, but a company that, even with over a billion users, has incredible room to grow.  

Show me the money

What remains to be answered, is how and when Facebook will become a cash generating machine.  As we saw with Google over the past decade, they quickly proved the doubters, whom did not believe that online ad revenues could fuel a growth company, were wrong. As we have seen with the incredible growth of Apple (NASDAQ: AAPL), with the iPhone and iPad, you don't need to be a fortune teller to predict the mobile internet will be where we spend most of our collective online time.  Apple has been not only an incredible growth story, but one of the few growth stocks that has not only had an incredible run in its share price, but an equally large growth in its cash balance.  Apple's popularity has also been fueled by the rise of our ability to access more and more information online.  

Of course, most people who own an iPad and an iPhone also have the Facebook app.  The question is, how will Facebook turn these interactions into cash?  What the earnings report demonstrated is that Facebook is growing mobile revenues, and is committed to increasing its ad business.  What is important about "Graph Search," is whether the improved functionality of their search causes it to be used more by users.  This idea is somewhat obvious, which is why investor displeasure was surprising.  

Facebook doesn't seem like it is looking to enter the handset market and compete head to head with the likes of Apple. The company would much prefer its users purchase an iPhone, then utilize their app to do everything from making phone calls to friends to searching for friend-suggested restaurants.  This interaction with their mobile application platform will be their opportunity to monetize the mobile user base.  Apple's product line strengthens users' connectivity to the mobile Net, and therefore provides more opportunities to access Facebook's platform. When the oft rumored fully-connected Apple TV comes out, Facebook could be the perfect social platform to promote Apple's media library.   

The Google blueprint

Google has made headlines with innovative products like self driving cars and their now famous Google Glasses. They purchased Motorola Mobility and have created an open source OS Android, but all this is to facilitate the use of their search engine for more and more things.  You can search Google's relatively new vertical search engines for everything from images to driving directions.  This continued user interaction allows more and more opportunities to sell ads.  

At the same time, Facebook has continued to improve user bounce rates and interaction on their respective platform.  As they continue to improve this interaction, they too will be able to offer more robust marketing opportunities to advertisers.  Facebook is still in its infancy of monetization, and with over a billion users there is incredible room to grow.  

The mobile online ad space will be the largest connected marketing network ever. Facebook's "Graph Search" will allow the company to compete for revenue in online mobile advertisements, but I am not saying that it will dethrone Google as the search king.  When the market reaches its maturity, which will happen quickly, there will be a potential customer base of several billion users, and there will be room for Facebook and Google both.      

Facebook has seen a rise in its share price as investors realize the company was not in as dire straights as many thought in the months after the IPO.  Recently, the company has been the victim of analysts issuing their own personal opinions on what they think the future holds for the company.  Facebook does face numerous hurdles before it can reach its potential, but that is the risk with growth companies.  If the company can continue on its course, avoid alienating users with privacy concerns, and continue to improve mobile internet monetization, we could be talking about Facebook in the same sentence as Google in a couple of years. 

mooseelz owns shares of Apple, Facebook and Google. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, 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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