Facebook (FB): Too Late to Climb Aboard?
Over a year ago, I was considering investing in a badly beaten down FB company, apparently "barely" hanging on at around $19 a share, down roughly 50% from its IPO price of $38. Unfortunately, hindsight is 20 / 20, and I did not pull the trigger that day, nor any day thereafter. For me, the opportunity costs associated with such an unproven business model seemed to outweigh the logical approach I had taken to theoretically value what I knew FB was slowly doing. In fact, on their most recent investor call, FB admitted that it was seeing a slight downturn in daily users among the "younger teens," creating a sell-off among investors and erasing all the gains FB had made in after-hours trading that day. Yet, oddly enough, with its share price now resting at $50.60 in pre-market trading, I still have that itch to throw my hat into the ring and get behind this social networking giant, even with all its uncertainty and risk.
As many employers understand, nothing beats experience, a time-tested mantra gaining new life with the recent economic downturn pitting the young against the old. I'm invoking these ideas mainly because I approach investing from a more theoretical--yet fundamentals-based--perspective in which "soft" data turns into hard data that one can act on fairly quickly. As a management consultant for three years at a top firm in Boston, I was able to discern which company initiatives will likely "move the needle" vs. which ones will likely amount to little-to-nothing more than political maneuvers meant to satisfy one CEO-level camp vs. another. What I've observed over the past year regarding the way FB is maneuvering is flat-out scary in terms of potential future earnings. Perhaps it's not too late to get on-board with FB, especially with the way analysts appear to be either too shortsighted in their valuations or they do not understand the power of FB's true product offering.
The Market's Problem: Following the Herd of Analysts
To start, in the past 48 hours, many analysts have focused on what FB has currently been up to in terms of gaining penetration in the mobile ad market, all the while shifting away from driving desktop ad revenue. As such, various media outlets laud and zero-in on FB's ability to increase their mobile ad segment of their business from about $150MM in the year-ago-quarter to roughly $880MM, an increase of ~586% year-over-year (yoy). This tremendous yoy growth simply scratches at the surface of the opportunity FB has sized up and set its sights on. Unfortunately, these analysts continue to miss what FB and its CEO Mark Zuckerberg are necessarily up to.
Now, the people barking up the right tree would be those folks who have been paying particularly close attention to when Zuckerberg makes public comments. In fact, his words have taken on such importance that it has become a scholarly issue at the college-level, the University of Wisconsin-Milwaukee now compiling "The Zuckerberg Files" apparently ad infinitum. However, I doubt even these individuals, with all their compilations on Zuckerberg's musings, truly comprehend exactly what he aims to do with his brainchild, FB. In fact, it's easy to wonder what more could you want to do with 1.19-billion active users when you've alreadymonetized them to the tune of $2.02Bn in revenue.
Well, how about making upwards of ten times (10x) that amount?
Sizing an Opportunity: What FB Aims to Conquer
Consider the following: quick Google searches (i.e., we can get more precise numbers) yield estimates of the global market-research industry anywhere from $20Bn to $33.5Bn. Sticking to the more conservative estimate from IBISWorld of $20Bn for 2013, this puts the overall market-research opportunity at roughly ten times (10x) FB's most recent quarterly revenue. Please note, this global estimate from IBISWorld does not involve direct ad revenue, which is what FB primarily uses to drive revenue today. (Direct ad revenue, whether mobile or desktop, represented 90% of FB's revenues in their most recent quarter.) Instead, what the IBISWorld report represents is a relatively brand-newopportunity that FB has yet to tap into fully. Still, I would argue it's one in which FB is quickly preparing to dominate in. This multi-billion dollar opportunity FB is working its way towards essentially is a no-brainer: companies will pay for user data that then allows them to create actionable customer segmentation analyses that they can then create highly-effective marketing campaigns with.
Why FB Will Dominate the Market-Research Industry Shortly
Just for a few seconds, please reflect on how much you, and / or those close to you, upload to FB's site. Even if you only add a few movies, some songs here and there, perhaps you even "like" a product or two along the way, you should now multiply that very base-level amount of information by the number of active FB users, and we're suddenly into a mind-boggling amount of data that appears too disparate to parse into meaningful, actionable pieces. Just as a matter of perspective, this would not even include the over 700 terabytes of data that FB must process as a result of FB posts, via its proprietary Graph Search. Yet nonetheless, FB has already begun developing effective algorithms that allow it to mine all of this data, including FB posts, enabling FB to identify relatively clear market trends.
In fact, the power of what we as users already voluntarily upload has not been lost on entrepreneurs--firms like Redpepper already have started monetizing this "freely provided" data. Redpepper monetizes FB data by pairing up with local businesses to offer "Facedeals" where a nondescript camera takes your photo as you walk into the establishment. Redpepper then mines FB databases using proprietary facial recognition software to identify your profile via only your face, and then it sweeps through your user history to then send you deals to your smartphone when you're nary five steps inside said establishment. Redpepper accomplishes all of this in a matter of seconds, and the technology is only advancing at a more furious pace. As Lesley Stahl from 60 Minutes found out, once you opt into these Facedeals and start venturing out to places, before you can even get seated, it's just a matter of seconds before you're offered a "Free diet Coke with the purchase of an entree."
And the opportunity for FB doesn't stop there. If you haven't caught on yet, Zuckerberg has built his empire on being one-step ahead of everyone else; he's constantly thinking about where this game necessarily must end. In fact, he already tipped his hand, but it was something he couldn't avoid. Have you heard about internet.org? Well this adds to Zuckerberg's "end game" in which he joins forces with other technology / internet companies in an effort to provide universal internet access to the entire world. Unfortunately, some still do not see the forest for the trees and claim that Zuckerberg and FB's "plot to get more users...is truly altruistic." However, nothing that increases FB's ability to generate not just ad revenue, but more importantly market research revenue (remember how the global market is currently more than 10x that of FB's ad revenue?) can be "truly altruistic." If you disagree, please look up the definition for "altruistic" and get back to me.
Putting This All In Perspective
Please note, I am not arguing that internet.org is necessarily an evil thing. I am just calling it for what it is: a business maneuver. As a now-public company, Zuckerberg no longer can remain beholden to just himself and a handful of others. Not even mentioning his executive-level steering team, Zuckerberg must satisfy his board, investors, Wall Street, and the like. He is under a level of scrutiny that necessarily demands he think like a businessman, which always and necessarily brings us back to the bottom-line.
If you take a close look at Zuckerberg's white paper, you will see that embedded in its 10-pages is a business plan that necessarily pushes FB's interests via tax-payer subsidies to connect the remaining billions-of-people in the world to FB. Sadly, the idealism and altruism people speak of concerning Zuckerberg's global-connectedness vision falls to the wayside when one considers what FB truly aims to do, what the long road ahead of them entails.
Nonetheless, one cannot ignore the sizable opportunity FB is hurtling itself toward with zeal. When accounting for what it would mean for an entire world to be on FB (and I mean literally on FB, like a drug) it becomes relatively clear that significant upside to FB remains. Remember, FB's end game involves utilizing data, freely provided to them, to then analyze and "cut" in as many ways as companies desire. Now, it's just a race to see who can conquer the remaining six-billion-person opportunity idly waiting to be "saved" from their unconnected lives. Note that Google (GOOG) and Amazon (AMZN) aim to do the same, though in slightly different ways. In fact, I hope the above analysis perhaps helps you understand why AMZN does not concern itself with turning a profit anytime in the near future. They're after the same end-game as FB-documenting and controlling the consumer tastes of the entire world.
"Of all the creatures that creep and breathe on earth, there is none more wretched than man." - Homer
Homer might be a little dramatic at times, but he might just be spot on there. We'll sell each other no matter what day and age we're living in it turns out.
By Hugo A. St John
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