Why Facebook Still Has A Lot of Growth Ahead
Facebook has built a social media network that generates significant use on desktop devices and most importantly on mobile devices. The company’s market cap has grown rapidly along with its users. Facebook has 1.65B MAUs worldwide, 1.09B DAUs, and 1.51B mobile MAUs. The user base is still growing and is composed of demographics which advertisers love: millennials. However, as time goes on, Facebook has to continue to establish its relevance as millennials are fickle users and rapidly jump to new products. In this article, I will explain what I believe are the most important growth opportunities for Facebook in the future: emerging markets messaging, Facebook M/AI, FB Live/Sports Stadium and why I am long even though the stock is very highly valued on almost any valuation metric.
The main reason I am bullish on Facebook is the possibility of the company dominating the mobile first world for the next 4 billion or so mobile users. In developed markets, Facebook is fairly well-established and monetizing ads. Users in developed markets such as the US and Europe have had access to the Facebook news feed for the past 10 years while smartphone penetration has grown close to saturation (for example: US has 72% penetration, UK 68%). While there will be continued significant revenue growth in the developed markets, I view this business almost similar to Google’s search business, a cash cow that can be used to reinvest in future growth opportunities.
So why are the emerging markets and developing markets so interesting? These countries are just beginning to develop economically stable middle classes with some disposable income. Because of this late development, these countries are able to jump forward on the technology curve and are adopting mobile phones as the primary computing technology first as it’s cheaper, portable, and has multiple functionality (texting, phone calls, search, etc.). In these countries, the prepaid model dominates as consumers want to pay as you go since disposable income is limited. This creates a unique opportunity for messaging/social media platforms that can connect users for free or through limited spend. One of the greatest examples of this is Tencent’s WeChat platform. As the Chinese population have engaged in mobile, WeChat took the opportunity to build a platform that is a combination of social media, gaming, messaging, payments, and commerce. It did this by first creating a simple to use, free messaging service and then building upon that existing user base. In India, most people use Facebook messenger and WhatsApp to connect with others over WiFi to keep costs down. The use of these messaging apps drives users to sign up on Facebook where they then are exposed to new delivery of content shared by friends, a much more useful way of content discovery then searching on Google. So not only could Facebook’s ad revenue dramatically expand with these new potential users, but also the company has the opportunity to create a WeChat like platform in these markets. This is not possible in more developed countries. For example, in the US, we have multiple messaging apps, social media accounts, payment apps (Venmo, Square cash) all able to be funded by investors flush with cash. A major driver of this future platform may be AI.
AI is important as it dramatically increases the usefulness of a messaging platform. A great AI solution could replace Yelp , Kayak, OpenTable, and possibly damage Expedia and other OTAs. Facebook is currently experimenting with Facebook M which acts almost like a personal assistant. It is essentially a chatbot that learns your preferences and can provide you with suggestions/solutions after reading the context of your message. It will eventually be able to book you a flight, reserve a restaurant, provide you with movie suggestions based on your mood, etc. Facebook M is currently a direct app that you need to chat with; however, in the future, the AI should be able to monitor your messages amongst friends and be able to figure out what you would need. Again, it could become an all-in-one solution to replace many different apps/services. Furthermore, if SMS commerce picks up speed, AI could drastically change how we shop on mobile rather than having to go through different apps. An example of a startup that recently launched and is targeting this space is Conversable. Being able to transact through messaging could allow AI-enabled agents to better predict consumer items that you would like to purchase and enable a revenue share with the end retailer. There are multiple startups targeting this space, including Jack Mobile, Operator, and Magic so Facebook M may not be the leader in the space. However, if need be, Facebook should be able to acquire any successful startup and integrate that in with messenger. In general, I would say that these trends are huge headwinds for Google to maintain their dominance in search in a mobile world with the transactional nature of mobile search. If true AI chats are successful, there is no need to search for items through Google on mobile. Hence, why Google is so focused on building its own personal assistant.
While these future growth opportunities are impressive, reinvestment of cash flows will not be possible unless the core product continues to perform. Recently, troubling articles have exposed that the news feed may be experiencing an up to 21% decline in original, personal content shared. This is concerning as ad revenue could decline if users flee from the news feed as it turns into a barrage of ads, artists promoting themselves, and news articles. Facebook has introduced some pretty amazing products to combat this: Facebook Live and Sports Stadium. These are basically better versions of what Twitter has tried to do already with Periscope, Vine, and Moments. If you listen to any earnings call of Facebook, it is clear the video is a huge focus for the news feed as it creates higher engagement in personal content shared as well as ads. Facebook Live is a beautifully executed version of Periscope, allowing you to see concerts and exciting news stories shared by your favorite follows or your friends. It keeps you engaged with what others are up to similar to a longer Snap on Snapchat. Again, this product attacks 2 other companies: Google and Twitter. Twitter’s failure to attract new users with video sharing has been well-documented even with its impressive product portfolio. Google, on the other hand, has YouTube which is the leader in video sharing. Facebook Live can take direct share from YouTube as artists post clips of themselves performing and users get to interact live with others and see each others comments to drive engagement.
Sports Stadium is another great way to experience major events that fans care about in an exciting manner. It is an area where users can go besides having to go to another website or app such as Disney’s ESPN or Twitter’s Moments. The UI is again beautifully executed and has videos and posts shared from various fans who are viewing it live. This is a much more engaged experience than simply viewing Gamecast or listening to commentators. As Facebook rolls out similar products for other significant fan areas, it becomes the go-to place to discover content and makes the news feed even more interesting. This will all help to garner more users and continue to enable the significant FCF generation coming from the main platform.
Although Facebook is highly valued based on traditional valuation metrics, there are several large growth opportunities ahead of the company that Mark Zuckerberg and the rest of the management team are thoroughly focused on. Execution on these opportunities could drive large TAM expansion which could expand further on the company’s current valuation. In my opinion, you should view the current valuation as an option on these future growth opportunities.
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