A recent survey by Forrester Research has revealed that Facebook (NASDAQ:FB) is still the most popular social networking site among teenagers in the U.S. despite the rise of Tumblr and Snapchat. Forrester analyst Nate Elliott said:
The results were clear: Facebook remains young users' favorite social network. More than three quarters of online youth use Facebook - twice as many as use Pinterest or Tumblr or Snapchat, and more than use Instagram and WhatsApp combined.
To Grow Revenue Facebook is Targeting the Younger Generation
The survey results mentioned above is certainly encouraging for investors. The company earned $2.5 billion of ad revenues in the first quarter of this year. We believe that the younger generation will help the company generate most of its revenues growing forward. However, Facebook is on the verge of reaching saturation in the U.S. and other developed markets and emerging markets are the next big opportunity for the company to grow.
Facebook's growing young user-base is an opportunity for the company to generate sustainable future revenues, and Facebook is trying to capitalize on it. Last week the company launched a Snapchat-like mobile app in order to grow its global user-base further. In addition to mobile messaging, the social networking giant is also emphasizing on gaming. In March this year, the company acquired the VR (virtual reality) gaming company Oculus Rift for $2 billion. The company also acquired WhatsApp for $19 billion in February.
Can Facebook Become Irrelevant?
In the digital tech world, irrelevancy can happen to a company anytime. We have seen it for BlackBerry (NASDAQ:BBRY), Motorola, and Dell among many others. We believe that Facebook's recent acquisitions and initiatives will protect the company from becoming irrelevant in the near term. However, Facebook is not immune to changing market conditions and irrelevancy can happen to Facebook too in the long run.
In technical terms, for a social networking company to survive it needs to have a positive network effect working in its favor. The term essentially means that the more people use a particular product, the higher will be its demand until equilibrium is reached. Facebook is spending billions of dollars in order to have a positive network effect for the company.
Facebook acquired WhatsApp for $19 billion, as mentioned above, which is ~13 times Facebook's 2013 net income and ~2.5 times its 2013 gross revenue. The company funded the recent acquisitions via a combination of cash and stock, which led to significant share dilution (more than 20% in absolute terms) since the company went public.
FB Shares Outstanding data by YCharts
It's clear that the company is trying to have the network effect at the expense of its shareholders and the trend is likely to continue. The question is why the company's share price is still appreciating. We believe that currently the Street is in denial mode that consistent share dilution will result in significant erosion of shareholder value in the long run. However, until the perception about the company changes, the stock will continue to scale higher.
Can Facebook Grow Smoothly in Emerging Markets?
We believe that the road to success in emerging markets will not be smooth for the media giant due to two factors, (1) Technology and (2) Content.
Technology: In the emerging economies mobile network and device conditions are very different in the absence of LTE and high-end smartphone access, which could lead to poor user experience. As a result, user-base may not grow rapidly.
Content: The proliferation of adult content on Facebook has been worrying. According to a news report, after the recent acquisition of Oculus Rift by Facebook, the adult entertainment industry is trying to integrate VR with pornography, which could spread adult content more rapidly across the social networking site. Governments in most of the emerging countries are very sensitive regarding adult content, and Facebook can even get banned in some of those countries, unless the company undertakes proper measures to control the proliferation of adult content on its network.
Although the share price of Facebook has risen meaningfully over the last one year amid an extremely exuberant market condition, we believe that the stock will continue to rise as long as the Street remains in denial mode regarding shareholder value erosion.
Business relationship disclosure: The article has been written by a BB Research stock analyst. BB Research is not receiving compensation for it (other than from Seeking Alpha). BB Research has no business relationship with any company whose stock is mentioned in this article.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.