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Facebook (FB) shares could gain a lot of value in the next few years if the company manages to diversify its revenue sources away from online advertising.
In Q4 2018, only $274 million out of Facebook's $16.64 billion in total revenue came from "Payments and Other Fees" - which is their non-advertising revenue category.
This means that only 1.6% of Facebook's revenue comes from sources other than advertising. However, this was still an all-time high for quarterly non-advertising revenue, up 41% from the $193 million in the year-ago quarter.
This graph shows how Facebook's non-advertising revenue suddenly spiked in Q4 2018, largely due to sales of Oculus Go and Facebook Portal.
Interestingly, the $274 million per quarter puts the annualized run rate of non-advertising revenue at a billion dollars.
Even though this number is currently small compared to the advertising business, it is likely that growth will accelerate in 2019 due to the many non-advertising growth opportunities Facebook is pursuing.
Here are 6 of these non-advertising growth areas that Facebook is actively working on.
1. Payments in WhatsApp
Mobile payments have become popular in many places around the world, particularly in China.
In the US and Europe, there is Apple's (AAPL) Apple Pay feature, which is a significant revenue driver in their fast-growing services business. Apple analyst Gene Munster estimates that Apply Pay amounts to 1-2% of Apple's services revenue, which would put the current revenue figure at about $400 million to $800 million per year.
Because Facebook has so many people using their apps regularly, they are a perfect fit for a payments service. They are currently working on monetizing WhatsApp with payments in India, where they have over 200 million active users.
The nationwide launch of the payments feature has been delayed due to some disputes with the Indian government about where the users' data will be stored. But it is highly likely that this will start contributing to revenue growth some time in 2019.
To give an indication of the size of this opportunity, Alibaba's Ant Financial, which owns Alipay, was recently valued at $150 billion. According to Statista, this market could reach over $1 trillion globally in 2019.
When this feature is rolled out in India and more countries, it seems logical that they will also do this with Facebook Messenger. In fact, Messenger has already tested features where you can send money to family and friends.
By taking a small cut of payments through these apps, this could become a significant non-advertising revenue driver over time. Unfortunately, Facebook has not given an indication of the size of the opportunity here.
2. Commerce in Instagram and Facebook Marketplace
According to Facebook COO Sheryl Sandberg, Instagram has over a billion users and over 25 million businesses have Instagram accounts. In addition, most Instagram users follow at least one business.
Many people use Instagram to discover new products and Facebook has been testing a lot of features to make it easier for people to shop.
There are even ongoing rumors that Facebook is planning to launch a standalone Instagram shopping app. There isn't much known about how this will all play out yet, but it is clear that the opportunity is massive given Instagram's scale around the world.
Facebook Marketplace is another opportunity that could be used for eCommerce if they allow more businesses to sell directly on the service. This service has 800 million active users around the world.
By providing eCommerce platforms for users and businesses, Facebook can grow non-advertising revenue by charging fees or taking cuts of the transactions.
The eCommerce market is over $500 billion per year in the US alone, so this opportunity could be massive if Facebook manages to gain market share.
3. Business Messaging in WhatsApp and Messenger
Many companies now use Messenger and WhatsApp to communicate with customers.
Facebook has started to monetize this communication by charging companies to send marketing and customer service messages through WhatsApp.
This feature was launched in 2018 and not much is currently known about how it is going. But it shows one way that Facebook's messaging apps can start driving non-advertising revenue in the future.
According to Allied Market Research, the business messaging market will grow to $78 billion by 2023. Given the wide global reach of WhatsApp and Messenger, it seems reasonable that they could become a major player in this space.
The $17 million QoQ non-advertising revenue growth in the Asia-Pacific region in Q4 2018 could be related to experiments with business messaging in India.
In 2014, Facebook acquired virtual reality headset maker Oculus for $2.3 billion.
Oculus makes money by selling VR devices, primarily the Oculus Rift, as well as the more portable Oculus Go which was launched in 2018. Although Facebook still doesn't have much to show from this acquisition, that could all be set to change in 2019.
This year, they will be launching the Oculus Quest, a virtual reality handset that is about as powerful as the Oculus Rift, except it functions as a standalone device that doesn't need to be connected to a computer through wires.
The Oculus Quest was shown on CES and got fantastic reviews. It will have OLED screens inside the device and sell for $399.
If Oculus can maintain a market share around 20%, then the potential revenue from these products could reach $2 billion annually by 2020.
The current market leader in VR devices is Sony (NYSE:SNE), with a 43% market share.
5. Facebook Portal
Facebook launched the portal devices in 2018. These are smart-home devices with screens and highly immersive video calling. When you're talking to someone, the camera follows you around and makes the video call much more personal and convenient.
They are also powered by Amazon's (NASDAQ:AMZN) Alexa voice assistant that increases their usability. The smaller device has a 10.1-inch display and sells for $199, but the larger one has a 15.6-inch display and sells for $349.
These devices were launched in Q4 2018 and they could become significant non-advertising revenue contributors in 2019. They also help Facebook gain a foothold in the growing smart-home market, which is forecast to exceed $50 billion by 2022.
6. Workplace by Facebook
Facebook also has an internal messaging app for businesses called Workplace. It charges companies $3 per monthly active user and enables employees to message each other, form groups, and do video calls and conferences.
This puts Facebook in competition with Slack and other enterprise messaging platforms. Facebook says that over 30,000 businesses are already using Workplace to connect their teams. This includes giants like Walmart (WMT) and Starbucks (SBUX).
To give an idea of the revenue opportunity here, the current market leader Slack was estimated to have an annualized revenue rate of over $200 million in 2017. However, there is a lot of competition in this space, not only from Slack but also offers from Microsoft (MSFT) and Google (NASDAQ:GOOG) (GOOGL).
Having access to 2 billion eyeballs each day brings an endless amount of opportunities to monetize. For this reason, Facebook is pursuing various avenues of growth that don't involve online ads.
Look for Facebook's non-advertising revenue to continue to grow in 2019 and beyond as these initiatives begin to drive more sales. This could help lift Facebook's valuation over time by diversifying its revenue sources away from online advertising.
That being said, it's important to keep in mind that all of the growth areas above are fiercely competitive. It is not guaranteed that Facebook will be able to succeed in any of these markets.
But given Facebook's massive user base, it seems reasonable that they could have a major advantage against other competitors.
Unfortunately, Facebook has not given details about the future revenue potential of these products and services and they are all lumped together in the "Payments and Other Fees" category.
However, they did say on their last earnings call that the big spike in revenue in Q4 2018 was due to sales of the Facebook Portal and Oculus Go
Disclosure: I am/we are long FB, GOOGL, AAPL, MSFT, BRK.B. 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.