Facebook: You're Missing The Forest For The Trees

| About: Facebook (FB)

Summary

A resurgence in the Facebook bear thesis has me yet again shaking my head. With a prominent short seller issuing his decree the bears have a new found courage.

The problem, like most Facebook bear theses, is the tunnel vision of Facebook.com and not the entire Facebook platform at large.

There is growth still to come in many of Facebook's assets, namely; Instagram, Messenger, and WhatsApp.

If one only focuses on Facebook.com then they are missing the forest for the trees.

In the last two weeks there has been a flurry of Facebook (NASDAQ:FB) articles and comments, as well as a particular notorious short seller, talking about Facebook being at the end of its growth phase or - as I've heard so many times over - has "peaked." What I've found to be a common theme in these negative assertions is the focus on Facebook ... the website.

Many of these analyses have focused too much on - or only on - Facebook.com and its associated metrics and not on Facebook the company. This will undoubtedly cause many investors to miss the growth allegedly said not to be present when in fact there is growth left not only at Facebook.com but Instagram, Messenger, WhatsApp, and, to a lesser extent, Oculus.

It must be a new found courage after one of the most popular short sellers issued their decree to cause this bearish uprising. There hasn't been much to tell me the financials at Facebook are set to collapse or the company is in trouble otherwise. Therefore, you can consider this article, at least partially, a continuation of my "ignore the noise" thesis.

Growth In: Instagram

Before Facebook IPO'd in May of 2012 it has not been just Facebook.com. The company bought Instagram earlier in the year for nearly $1B. But, much of the focus had remained on Facebook.com's users, its time spent on the app, and its transition to mobile, and for good reason - it was the only source of revenue.

More recently that single platform no longer holds the revenue reigns - at least not alone. It's no longer just Facebook.com bringing in the cash as Instagram has come online monetarily and begun contributing to the top line.

What's great about Instagram is it features better ads due to the inherent nature of the platform showcasing pictures and only pictures. A user's stream is picture after picture after picture. Throwing in an ad which shares the quality and creativity similar to a friend's doesn't cause a skip in the heartbeat of the stream. Because the app lends itself to this high quality ad content, it fetches two and a half times the click through rate of any other social media ad and thus higher ad prices.

Switching to user growth, Instagram just recently passed 500M monthly active users (MAUs) and 300M daily active users (DAUs). While it's still less than half of Facebook.com's daily active user base it is more than twice Snapchat's (Private:CHAT) and two and a half times Twitter's (NYSE:TWTR). Said another way Snapchat and Twitter combined only garner 286M daily active users to Instagram's 300M.

Going back to the $1B purchase price of Instagram in 2012, there was much worry and speculation Facebook had grossly overpaid for the then 35M user, picture sharing app. Fast forward a few years, and according to estimates from eMarketer, Instagram is set to bring in $1B in revenue this coming year after bringing in an estimated $595M this past year.

Something tells me the purchase price was a pretty good deal, especially if Instagram is only at the beginning stages of ramping up ads and advertisers. If Instagram is to continue upping its video product, which it is by increasing video length to 60 seconds, then its 40% increase in time spent watching will bode well for advertisers.

There's still plenty of runway left for this jetliner to ramp up further revenues and bring a more robust and accessible product to advertisers. With two and a half times the likelihood of clicking on your ad you would be willing to pay up as well.

It would be a great mistake to discount Instagram in the Facebook story as not being a growth driver with the potential to bolster Facebook's overall business and rely less on one platform.

Growth In: Messenger

After only listing off one of Facebook's products (other than Facebook.com, of course) we are already onto the first non-monetized asset. Now, most people at this point would say, "Well that's exactly the problem. There needs to be revenue generation from all their products." I would tend to agree but at what rate and at what cost?

As my points about Instagram alluded to, it has taken four years before the money spent on the acquisition actually came back to the company. During that time, however, the user base grew 1,328% while the product developed and matured. Not only did the product grow up but so did the tools Facebook uses to give advertisers a full, detailed overview of their campaigns.

There are a few implications of those stats and what has gotten those stats there. If ads were on Instagram the day after Facebook acquired it there likely wouldn't be much of a demand for ads because it was unproven and likely would have cost Facebook more in resources to run the ad then the ad would have been worth. Second, it likely would have drove users away rather than to it at such a young stage. Facebook has become very, very good at weaning users into ads and giving them a treatment of change blindness or perhaps, in this case, ad blindness. Third, Facebook hadn't developed their mobile strategy and didn't have the tools and resources yet to give advertisers and users an effective ad product.

Therefore, it's not surprising Facebook hasn't introduced some kind of revenue producing stream with Messenger, yet. During this "un-monetized time" Messenger has grown from 200M monthly active users to 900M. Further, the company has added several features to Messenger before and since it unbundled it in 2014 which can likely attract revenue from businesses or even the users themselves.

Some of those features include voice calling, video calling, and monetary transactions. It's likely the last one gets most investors' attention because there are other companies like Paypal (NASDAQ:PYPL) whose entire business is collecting transaction fees. So far, however, Facebook has chosen to make this feature free (see slow to monetize theory above).

In a recent Seeking Alpha article Andrew Mok contends WeChat is a better platform and has better features than Messenger. While I think he did a better job of conveying how Facebook has more potential going forward than WeChat, he did do a great job of pointing out all of the features that can make a messaging app useful, productive, and create revenue.

In essence WeChat users can do everything from pay - and split among friends - a restaurant check, hail a taxi, pay utility bills, and take care of their brokerage accounts. Right now Messenger is in a very early stage if you put it next to those potential possibilities. In fact, new customer-business friendly capabilities have just been added in the last several months.

The next natural question is how and when Facebook monetizes those features. I picture it ranging from referral fees with businesses to partnership deals to in app purchase (more like in app within app purchases). Many people contend this is far-fetched, will drive users away, and may pose conflicts of interest among partners on other Facebook platforms. However, we know Facebook has the vision and execution ability as displayed in Instagram - and Facebook mobile I might add - and combined with the ideas seen in other platforms like WeChat I believe this is hardly out of Facebook's reach and capabilities.

Finally, I believe monetization is not terribly far off. It will start slow and Facebook will use the process to learn along the way on how best to position them, making users and businesses happy. If we use the Instagram timeline it took two years before the company introduced ads and about three before it was ramped up to a material amount. If we take the Messenger timeline from the unbundling time period then we are nearly there for Facebook to introduce some kind of monetization. Therefore, it may begin the end of this year with meaningful monetization coming in late 2017.

Growth In: WhatsApp

Well here we are, the inevitable analysis on Facebook's largest purchase and one of the biggest in tech in general. Many criticized - and still criticize - this purchase as a waste of money (mostly stock) wondering how anyone could have it pay for itself over the course of its life let alone in the near future.

A lot of investors wrongly distill the acquisition as a redundant function of Facebook's Messenger platform. The company already has a messaging app they say. This much may be true but the real core of the acquisition wasn't functionality as much as it was its user base and the business defense it provided.

Look at WhatsApp from a more down to earth, non-technology related perspective. Say you own a dry cleaners on one side of town while at the same time there is another dry cleaners on the other side of town. Initially you think you are in direct competition but you realize everyone in town goes to your dry cleaners. The other place on the other side of town attracts all the out of town'ers. Only sometimes do you both exchange customers but through asking you find out your customers do it based on where they were in town at the time and not so much on preference. You get to thinking, with your bigger investment backing you could expand your market to all the out of town'ers just by owning the other cleaners. You figure if someone else were to buy them you'd have to worry if they would try to encroach on your in-town market. You decide to buy the business and even though you provide very comparable service and have great reviews you just eliminated any threat of a chain brand buying them and squeezing your market.

It's no different with WhatsApp's mostly non-US demographic of users. Only 7% of North American mobile users use What'sApp on at least a monthly basis. It's mostly Latin American and African regions using WhatsApp.

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What's more, WhatsApp has surpassed 1 billion MAUs. That's more than Messenger and is the most monthly users of any encrypted messaging app.

Actually, let me dazzle you for a moment. Did you know messaging apps have surpassed social networking apps? Yup, it's true, messaging is more important than social.

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So Facebook.com and Instagram are the biggest and one of the biggest social networks in the world, respectively, and Messenger and WhatsApp are the biggest messaging apps in the world. Facebook is the dominant player in all things mobile.

Go ahead, read it again.

Now that it has sunk in, I've spoken enough about why the acquisition makes sense. So how does Facebook go from here?

Well it's not too much different than Messenger except WhatsApp may have a better platform for all of the features which will make it extremely useful to users. These are already the things the rest of the world is used to using as Andrew pointed out in his article. If WhatsApp simply adds these features it will not just not harm user growth but bring in more and potentially steal users from other platforms.

Not only that but I believe WhatsApp has a great opportunity in chatbots. That's right, I went there. If you already blew off my thought then investing in Facebook is not for you and there is no amount of writing I could do to convince you this is an important point in the future of communication. If you have a problem with Facebook and its interest in chatbots then you'll have to take it up with Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM), Twitter, and Alphabet (GOOG, GOOGL) (who has been silent but yet is very likely in the trenches of this) because all of these tech giants have taken to the coding board to get the best AI bot users can make use of.

The technology is very much in an early stage so there will need to be a lot of progress to come but I believe Facebook has the team to mount a charge to the technology summit. Once this technology is perfected (as well as any technology can be) then the possibilities are endless to get businesses on the platform, just like they are for Pages on Facebook.com. From there it won't be difficult to understand what businesses or users will be willing to pay or trade for.

WhatsApp may have appeared to be a pricey acquisition but Facebook did it well by using stock which, at the time, was undervalued. It's important to understand that creating the biggest mobile company in the world will cost a bit upfront. The payoff will be on the back end when the best minds in technology add the features that will not only be good for user retention but also revenue generation. The great thing is there are other platforms taking care of the revenue growth in the meantime while platforms like WhatsApp carefully navigate their way to the front of the revenue line.

So About Those Trees... Or Is It The Forest?

There is quite a bit happening at Facebook needing the attention of an investor. Everything from Instagram to messaging, Facebook has the potential to turn them into revenue generating machines. Those wary about "potential" need to check the company's track record as it relates to ads and mobile monetization. Many - including the market - doubted Facebook could monetize mobile and is the single reason why Facebook stock has ever seen a $17 handle. "How we doin' now?"

While I'm not surprised there are doubters at this stage, it means we're at another inflection point; a point where Facebook could launch into its next phase of revenue growth. They have proven themselves capable of beating others to the money in mobile and I don't see it stopping here.

With all that said, stop focusing on Facebook.com, its users, and metrics on a standalone basis. Doing so will cause harm to your portfolio (or at least not give it the respect it deserves). Investors need to take a holistic look at the company and see each of its trees creating a robust forest.

And to think, I haven't even touched on the virtual reality side of the company...

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Disclosure: I am/we are long FB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.