I originally published an article entitled "Generation Y Says Buy Facebook," pre-IPO, outlining Facebook's underappreciated growth potential. On July 26th Facebook will announce its first quarterly results since going public.
In the past several months Zuck has made a number of important moves to address Facebook's weaknesses, and further cement its place within the realm of social networking. Below I've highlighted some of the biggest moves he's made in the past quarter.
Improving Mobile Monetization
Although Facebook has made numerous moves to improve mobile monetization, three seem to be the most significant.
"Having some location-based element to advertising can be very powerful, and if you combine that with all the personal data Facebook has, the potential is enormous."
I couldn't agree more with analyst Colin Sebastian's (quoted above) analysis of location based ads. With ads that are specific to location, Facebook will have the opportunity to give users ads that are even more relevant, and command a much higher price. Just as an example, let's say you 'like' Lululemon (LULU) on Facebook and are shopping around an area with a store. Facebook can immediately send a special offer from Lululemon to you on your phone, or just notify you of the store's location. This would obviously command a higher price for advertisers, and it would be a service that only Facebook could offer because of their unique ubiquity across all consumer types.
"Facebook's new mobile ads for apps are potentially highly lucrative. Facebook would charge advertisers every time an app is installed on a users' smartphone, one of the people familiar with the plans said."
This utilizes Facebook's Connect feature (allows you to sync your Facebook account with other sites such as Yelp (YELP), LinkedIn (LNKD) or Amazon (AMZN) among others) in an extremely innovative way. From a bigger perspective this is just an example of how easily Facebook can start to monetize (in so many different ways) its huge presence with consumers.
What's the day when the most people visit your Facebook? Your birthday. Facebook's acquisition of Karma couldn't fit into this growing trend any better. Karma's mobile gift giving app makes it extremely easy to give your Facebook friends gifts right from your phone. This almost fits perfectly with Facebook's wealth of data and consumer products, it's not that far off to assume Facebook could even give gift suggestions through Karma. Another way to improve the service would be noting brands your Facebook friends like to improve the gifts you give them.
So how does Facebook make money from this? Take a cut from every transaction. The potential of this acquisition (if integrated well) could mean huge things for online retail and advertising on Karma as well.
Karma even has featured gifts, which is another way for Facebook to harvest revenue. Advertisers could have the opportunity to pay Facebook to have their gift 'featured' on Karma.
The Facebook Exchange
I will admit this is about as controversial as it gets. But the potential here definitely outweighs the inevitable 'privacy rights' backlash. The Facebook Exchange is a program that would allow Facebook to track users' 3rd-party website browsing and then cater ads directly related to that browsing upon their return to Facebook.
The Facebook Exchange (FBX) is addressing a huge weakness thus far in the social network's advertising, "purchase intent." For example a user who Googles a product is far more likely to buy it than if a seemingly random ad pops up for it on Facebook. FBX could change all that, these ads would be much more relevant to consumers, and actually might lead to consumer purchases. This is exactly the kind of aggressive ad monetization Facebook has needed to implement for some time.
Acquisition of Face.com
This is much bigger than it seems. Face.com specializes in facial recognition technology, although this helps users to identify friends automatically when tagging pictures, the long term implications are much larger.
If you've been in the tech-loop this year you've heard of Project Glass from Google (GOOG), which is scheduled to hit consumers in 2014. There are even rumors that Apple (AAPL) is developing glasses as well, because of patents filed for "see-through display technology that may find a home in some type of connected eyewear." What's Face.com's place in this? Facial recognition technology that automatically links the people you see on the street to their Facebook pages.
Although you might not like it, this is where the future is headed. Since Facebook's acquisition of Face.com the website and app have been shut down so that it can "focus on new products at Facebook." Sounds like they are perfecting this technology to be integrated into the futuristic new category of 'smart-glasses.'
Currently I don't see this feature being monetized, but Facebook will benefit greatly from it in other ways. Integration within both Google's and Apple's glasses would create a huge barrier to entry for other un-established social networks, and take Facebook integration within users' lives to the next level.
iOS 6 Facebook Integration
Facebook, as of iOS 6 will be automatically integrated in the new iPhone's operating software. This sets up another huge barrier to entry for new social networks, who won't have the opportunity to be automatically established within the top mobile device.
This could mean big things for overseas expansion as well, as Apple expands its presence into India and other Asian countries Facebook could benefit as well.
Although Facebook trades at 48x 2013 earnings, its growth is really just beginning. From 2000-2011 the total amount of internet users grew 528% from 429 million to 2.2 billion. And the trend of more people using the internet isn't going to stop anytime soon. If Facebook can retain its status as the top social network and successfully expand into emerging markets, then its growth will easily be able to justify a valuation well above $31 per share.
Disclosure: I am long AAPL.