Facebook (FB) has sent an invitation to the media to "come and see what we're building" at its Menlo Park, Calif., headquarters next Tuesday January 15. There has been significant speculation surrounding what the "we're building" is referring to. So far, I have seen five leading theories from analysts and pundits, but one obvious potential new business, and I believe the most likely one, has been absent from the buzz.
Here are the top theories to date:
- Social Search Engine
- Music Sharing site
- Carrier Mobile Integration Platform
While all hold merit, all of them also have complications and drawbacks. The company is already working on a social search engine, so this could be it, but I doubt it will announce an expansion of this tool to the broader web to compete with Google. There is not enough profit in music sharing (nor is it worthy of a media event - see Amazon's (AMZN) recent release for AutoRip), and the building of a smartphone would limit its social footprint - so I do not see those two being announced. Carrier integration is an interesting idea and offers good potential, but is that substantial enough?
Of the five listed above, I believe the most compelling is e-commerce. It has already quietly entered the e-commerce business through its proprietary gift service (through the acquisition of Karma), which I think can be a real game changing concept for how consumers purchase. This is a brilliantly differentiated e-commerce strategy that has the potential to be a massive, high-profit business and dislocate current low margin e-commerce competitors - especially when directly connected to over 900 million global users. While I see Facebook continuing to expand that niche in areas where its knowledge of the individual will drive high-margin consumer behavior (i.e. connecting the social self with consumption), I do not see Facebook becoming a down and dirty broad line distributor like Amazon, which is focused on expensive fulfillment operations.
Announcing "Facebook Cloud Services"
What I have not heard in the discussion is Facebook entering the cloud services business. Facebook already has one of the largest and most sophisticated Data Center footprints in the world, and is keenly focused on driving the lowest cost Performance per Watt in the industry and started the Open Compute Project to do just that. Its technical team is outstanding and its "make versus buy" sourcing strategy is highly effective at wringing every last penny out of suppliers. Facebook is as well positioned as Amazon or Google, if not better, to become the global leader in Cloud services. It seems obvious for it to leverage that expertise and cost leadership to compete in an extremely fast growing and profitable market. The following table highlights that competitors in this space have significantly higher multiples than Facebook, and therefore this also offers a multiple expansion opportunity. With all of the grief given Facebook's valuation, its shares look undervalued compared with these potential competitors.
While only Facebook knows what will be introduced at Tuesday's media event, I would not be surprised if what Facebook is building is "Facebook Cloud Services."
Disclosure: I am long FB.