I've been a vocal believer in Facebook (FB) for some time, and while I was also in the minority that believed its IPO price was not outrageous, I still waited for things to calm down before eventually taking a position. There's no doubt that my trade has worked out very well so far.
The stock is facing some resistance now as some investors and employees (such as Sheryl Sandberg) sell off parts of their holdings. Yesterday I was asked if I would consider selling part of my position. Absolutely not. If anything, I'm a buyer at these prices, and I am seriously considering adding to my position. Why? Let's start by going back to some of the initial concerns about Facebook's valuation:
- User growth would slow down (How much higher can you go when you've hit 1B users?)
- Advertising revenues growth could not hold steady for much longer (How many more ads can be added to one page?)
- Users were increasingly accessing Facebook through mobile devices where the revenues/user were much smaller
I've always been convinced that while those speculations are not completely irrelevant, they are not what Facebook shareholders should be looking for. In fact, none of those points ever concerned me. I continue to believe that a more legitimate concern were the competing social networks (Google+, Tumblr, Path, etc). Of course, Facebook continues to hold its ground even though it has sometimes required acquiring competitors, as was the case with Instagram.
Missing The Point Of What Facebook Is All About
Google remains at the center of the internet in many ways, but you could certainly argue that Facebook is also right up there as Google's main competition. A very significant amount of time is spent by users on the platform where they are sharing information, photos, etc. In fact, the platform is so significant that a large number of sites have built services, apps or websites that users can sign up for with Facebook Connect. This is significant. I continue to believe that Facebook's growth potential lies in increasing its role as a middle man. Not only can Facebook act as a middle man and "tax" companies such as Zynga (ZNGA), TripAdvisor (TRIP), Netflix (NFLX), and others, but it could also be building deeper relationships with both local and worldwide companies. In some cases, that will only mean providing them a way to communicate with customers (as is currently done through pages), but it could become a deeper relationship that would include advertising revenues, selling actual products, and providing specific offers directly to consumers.
Last week, reports surfaced that Facebook will be offering a mobile payment solution. It will not entirely compete with Paypal, because Facebook will not be processing those payments. The report is significant, because it's a major step forward in becoming a bigger player in the ecommerce field. One of the reasons why shopping on Amazon is such an enjoyable experience for users is because the payment is integrated. Facebook could offer a comparable experience for all of its users in a number of "ecommerce stores". Even if Facebook ends up only taking a small percentage of those transactions, it would bring in significant revenues.
When I look at Facebook's P/E, I continue to see a company valued as if advertising was going to be it's core 5 or 10 years from now. Yes, adding video ads and integrating those ads in the newsfeed will help generate more ad dollars, but I continue to think the potential is much greater.