Facebook: Marketplace Is A Big $5 Billion Opportunity
Summary
- Facebook continues to make its push into e-commerce with the launch of Marketplace, a Craigslist spin-off within the Facebook ecosystem that matches local buyers and sellers.
- Just as it makes sense for corporations to allocate ad dollars to Facebook as the platform's reach grows, it makes equal sense for sellers to allocate listings to Marketplace.
- Messenger recently acquired the ability to process payments natively, so we believe Marketplace will acquire the same ability in the near future.
- An in-house payment processing system will turn Marketplace into a $5 billion-plus annual revenue opportunity for Facebook.
Facebook (NASDAQ:FB) recently launched Marketplace, a Craigslist spin-off within the Facebook ecosystem that matches local buyers and sellers. It's a build-out of Facebook's current buy-and-sell Group pages and a crucial component of Facebook's attempt to consolidate e-commerce. Although the expansion is in its infancy and far from a finished product, we identify Marketplace as a potential $5 billion-plus annual revenue opportunity for Facebook in the long-term. Pending global user growth, we even see upside to our $5 billion opportunity estimate.
This isn't Facebook's first plunge at a marketplace product. In 2007, Facebook launched the first iteration of Marketplace, but that wasn't met with much enthusiasm from the platform's users. A year and a half later, Marketplace was revamped, but users still weren't warming up to the idea. By 2014, Facebook had completely shut down Marketplace and subsequently launched buy-and-sell groups.
Buy-and-sell groups have gained significant traction, though, as Facebook reports that more than 450 million people (or over 25% of its monthly active user base) visit a buy-and-sell page each month. We think this is a signal that e-commerce dynamics have changed dramatically since 2007 and that selling is becoming a more social experience.
When Marketplace first launched in 2007, Facebook had 50 million monthly active users while eBay (NASDAQ:EBAY) had 83 million active users. If a seller wanted to sell an item, it made a lot more sense to do so through eBay because the product was in front of 33 million more potential buyers. Today, Facebook has grown its user base by more than 34x since 2007 to more than 1.7 billion monthly active users, 450 million of which visit a buy-and-sell page each month. Simply, the inherent P2P network is much larger now than it was in 2007. By comparison, eBay has only doubled its user base to 164 million active buyers. Whereas eBay offered sellers 33 million more potential buyers than Facebook back in 2007, Facebook now offers sellers at least 300 million more potential buyers than eBay (and as many as 1.5 billion more). Just as it makes sense for corporations to allocate more ad dollars to Facebook as the platform's reach grows, it makes equal sense for sellers to allocate listings to Marketplace.
As it stands, Facebook's Marketplace currently does not process payments in-house. Marketplace is simply a P2P network connecting buyers and sellers. That alone is a valuable asset for Facebook as it will increase engagement and Facebook could sell promotional services to certain sellers, guaranteeing the seller a top spot after a search. The true potential of this expansion, however, lies in Facebook gaining the ability to process payments in-house.
Assuming Facebook eventually moves the transaction process in-house (buyers and sellers complete the transaction within the Facebook ecosystem), then that means Facebook would likely set up a revenue model similar to those of Etsy (NASDAQ:ETSY) and eBay. In those models, Etsy and eBay charge a listing fee for each item and then a transaction fee for each transaction completed through the platform.
In this model, we think Facebook can grow its Marketplace community to at least 340 million active buyers. Although Facebook reports 450 million people visit a buy and sell page each month, the word the company uses is "visit" and we think the actual buying community for Marketplace will be slightly smaller. As a rough estimation, we assume that in the long term, Facebook can turn 80% of those buy and sell page visitors into active buyers on Marketplace, implying a buyer community of approximately 360 million (bigger than eBay, Etsy, and Amazon (NASDAQ:AMZN)).
We think Facebook's Marketplace is potentially a $50 billion-plus GMV annual run-rate platform. Last quarter, Etsy's GMV/buyer annual run-rate was just over $100. Ebay's GMV/buyer annual run-rate was just above $500, pointing to bigger ticket purchases relative to Etsy as well as more transactions per buyer. Facebook's Marketplace will likely feature smaller-ticket purchases similar to Etsy, but we think buyer frequency will be higher given the wider range of product offerings relative to Etsy (Etsy's product offerings are niche). Along this train of thought, we think it is safe to assume Marketplace can one day at least get to a GMV/buyer annual run-rate of $150, representing slight growth from Etsy but still significantly below eBay. A $150 GMV/buyer annual run-rate with 360 million active buyers implies a $54 billion total GMV annual run-rate.
Recent quarterly data suggests Etsy takes around a 5.6% commission on its GMV ($0.20 listing fee plus 3.5% transaction fee) while eBay's commission is just north of 8%. A conservative assumption for Marketplace, then, would be a 5% GMV commission. Under that assumption, Facebook could take home around $3 billion per year in transaction revenue from Marketplace.
Much like Etsy already does, Facebook will likely build out a seller services component for Marketplace to augment revenue streams. These are services sold to sellers to help them get more exposure to buyers and ultimately sell more product. For Etsy, seller services revenue amounts to roughly 7% of GMV, but this is a site geared exclusively toward shopping and with a highly specific target audience. Marketplace could likely net seller services revenue around 3-4% of GMV, implying sellers spend about half as much on Marketplace relative to Etsy to promote product. That is an additional revenue stream of just under $2 billion per year.
In total, we think Marketplace has the potential to add around $5 billion per year in revenue for Facebook. Marketplace is a huge growth opportunity for Facebook, but a lot of that potential growth relies on the platform's ability to process payments in-house and charge a transaction fee. Given that Messenger recently acquired the ability to process payments natively, we think Marketplace will follow suit and be able to natively process payments within a few months. Once that is in place, we think a domino effect will be in play, and believe $5 billion in annual revenue from Marketplace is not too far off.
This article was written by
Analyst’s Disclosure: I am/we are long FB, AMZN. 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.
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