Facebook (FB) reaches over 1.1 billion unique visitors every month and over 660 million unique visitors every day! The scale and reach of the company is unprecedented and like nothing any internet company (or investors) has ever dealt with before. That being said, there is an extremely large amount of value for Facebook to address their users base to continue building on their profitability.
Key people running the show
CEO Mark Zuckerberg has had a long term vision from the beginning and has surrounded himself with the right visionaries to continue growing the company. Sheryl Sandberg and David Ebersman are sound operators and can help the company navigate any challenges and opportunities. The firm also has a top notch board that includes Netflix (NFLX) CEO Reed Hastings, Marc Andreesen (who basically created the first widely used web browser), billionaire Peter Thiel who was the first outside investor in Facebook, and former White House Deputy Chief of Staff and banking veteran Erskine Bowles.
Moving forward, can Facebook copy Apple?
Facebook will have to overcome many hurdles, but with the audience size they reach, the company has a tremendous long term opportunity that they should be able to execute against. The million (or billion) dollar question remains 'how big could revenues become?' or equally important 'how large could margins be?'. This is so hard (if not impossible) to estimate because it requires thinking about what future businesses and opportunities the company might enter, not merely extrapolating the current businesses. Before 2007, did investors really think that Apple (AAPL) would have one of, if not THE most popular cell phone in the world, let alone popularize and dominate the tablet industry? Before 2001 were any investors anticipating the creation of the iPod and how it will transform the way the world listens to music? Investors need to think about the potential opportunities present at Facebook before they are announced, and the opportunities are plentiful. Investors sitting on the sidelines waiting for the next big announcement risk the opportunity of missing the boat.
If I have ideas you can bet Facebook management has even better ones
The first idea that comes to mind would be Facebook expanding in to eCommerce. What if Facebook would cut a deal with Amazon.com (AMZN) and opened up "Facebook Stores" where inventory from Amazon.com and its affiliates could be viewed and bought directly on the Facebook platform. Amazon.com would be able to tap directly into Facebook's 1.1 billion monthly visitors and increase their reach so I see little reason why Amazon would be against such an idea. By doing simple math with very conservative numbers, if only 1% of users shop at the store per month and spend $50 a month with a typical 15% affiliate fee this can result in ~$1 billion per year in incremental revenues for Facebook which would also be a very high margin and fall mostly to the bottom line.
Last year, Facebook rolled out Subscription services in the app center where subscriptions helps a business "establish a recurring revenue stream and offer updated content or premium experiences for a fee on a weekly or monthly basis." Currently, Facebook has such arrangements with Zynga (ZNGA) and Kixeye. But what if Facebook can get it's users to start a monthly subscription to Hulu, online radio such as Pandora (P) or with Netflix (whose CEO sits on the board of directors of Facebook.) Assuming a 10% cut of the revenues, the potential bottom line can be in the billions and would be pure margin and will delight investors who place so much emphasis on the EBITDA line.
By no means is Facebook going to pursue these ideas (or maybe they are?) but what my examples illustrate is that the sheer size of their user base provides so many business opportunities it is staggering. You can be sure if investors ask themselves "What if Facebook does X" then chances are likely that management has already considered and evaluating that same idea.
Just getting started
Facebook is merely at the beginning of creating a platform that will integrate the social layer and social utility throughout the rest of our activities as it has done so successfully over the past 5+ years. The company's large reach provides a tremendous amount of new business ideas, which can come to fruition in little time. Facebook management has demonstrated an ability to move quickly and make necessary changes. As an example, in less than one year the company ramped its mobile revenues from 0% to 30%. By no means whatsoever has the company truly figured out the best way to monetize mobile usage yet, but the company is on the right track and made tremendous progress in such a short time that surprised investors and caught shareholders off guard. This should put to rest calls to have Mark Zuckerberg fired.
When the monetization catches up to the user base, the financial implications become suddenly significantly material. In the end the long-term investor will be rewarded as bulls are willing to believe this longer term thesis and ride out any near term fluctuations. Facebook will be a key platform for the Internet for the foreseeable future.
The rapid shift of activity from desktop to mobile caused a decline in advertising revenues in the past as Facebook did not have an advertising product on the mobile platform. Following the March 2012 launch of news feed for mobile, and the June 2012 roll out of mobile downloads, mobile has grown to levels that shareholders can appreciate.
Advertising revenue represented around 84% of the company's revenues in 2012 and saw sequential acceleration over the last three quarters to 43% year over year growth in the first quarter 2013. Mobile drove all growth in 1Q and now represents 30% of revenues, up from 23% in 4Q. Mobile is being driven by higher monthly average users (MAU), higher engagement, and improved monetization with the continued roll out of News Feed and mobile app installs.
Some analysts are calling for mobile ad revenues to represent 65% of ad revenues as new ad formats, targeting capabilities and engagement drive monetization higher.
The key area of growth within the mobile sphere is relatively new to the Facebook model and still a work in progress in terms of form factors and monetization capabilities. The mobile app install business is performing well and investors should believe there is a large gap to close in terms of Facebook's revenue generated from mobile versus time spent.
Balance sheet is great
Facebook ended the most recent quarter with $10.3 billion in cash and short-term investments leaving the company very well capitalized and also maintains a 5 year undrawn $5 billion credit facility. The company has $1.5 billion in long term debt and $420 million in long term lease obligations. The long term debt is due October 2015 and was converted to a fixed rate of 1.46%. The company is in great position for additional M&A as well as "acqui-hires" in the future.
Facebook recently reported their best quarter yet, and satisfied investors on the metric that mattered most in mobile ad revenue. The company is currently leading the next phase of Internet growth and will continue doing so for the foreseeable future. It is positioned well to succeed in the rapidly evolving trends within the Internet and all connected devices. With strong growth prospects, a proven history to silence critics, and a strong management team, Facebook shares should be bought today for the long term.