FACEBOOK (FB)
INVESTMENT THESIS
Imagine a publishing company that doesn't have to pay for, create, or produce it's own content but has over 2.6 billion readers a month.
INVESTMENT THESIS
The Investment Thesis for facebook is founded on three pillars
1. Active Users – Facebook has 1.7 Billion Daily Active Users (DAU’s) and over 2.6 Billion Monthly Active Users (MAU’s) across the globe.
2. Advertising Platform and Machine Learning – facebook is an advertising
platform which uses artificial intelligence to target ads to the individual user for the highest possibility of of a conversion to a sale. The average revenue for each user in the First Quarter 2020 was $34.18 in the USA and Canada
and $6.95 globally.
3. Additional Platforms – Whatsapp, Instagram and messenger provide platforms for future monetization through advertising. April 27, 2020 Facebook announced two additional services, Messenger Rooms
to compete in the Video Conferencing space with Zoom. May 19, 2020 Facebook announced ‘Shops’ which allows small to medium sized businesses who had limited website or internet exposure to quickly create a ‘storefront’ within the facebook
ecosystem.
When we look at an Investment Thesis it’s important to consider it within the context of three important areas.
Best in Class - Facebook has a global exposure to over 2.6 billion users and is effectively part of a
global duopoly, with Google, in the online advertising industry which has high barriers to entry.
Secular Growth Trend - Facebook has used its first mover advantage in social media and the scale and scope of global exposure
to create its own secular growth trends and the platforms by which society stays connected.
Strong Macroeconomic Environment - During the Covid-19 pandemic, the underlying macro-economy weakened with over 40 million
unemployed in the US. This has been counterbalanced by over $8 Trillion in US Government financial stimulus. During weak economic times, and as the US economy begins the recovery process, it's important to consider facebook business within
the context of Marketing 101
- Companies must advertise to create both a ‘need’ and a ‘want’ to generate consumer demand. In theory this becomes more important during weak economic times.
- It costs more to regain a lost customer than it does to maintain an existing and loyal customer base.
- In competitive markets, companies which don’t advertise risk losing market
share. Markets become more competitive during weak economic periods.
CURRENT RISKS
There are three risks to the stock price
1. Lower advertising prices - prices are based on an ‘auction system’ where
advertisers bid on page views. Advertisers may be reducing advertising volume, or reducing budgets, which lowers prices.
2. Politics – There are lingering issues over privacy and regulation.
3. Increased costs – In order
to mitigate government restrictions and ensure the ‘health’ of the platforms, facebook has been investing heavily in hiring, artificial intelligence and minimising false information and accounts.
what does that mean at moneywiseHQ
Facebook
has discovered one of the great secrets to societal behaviour - providing the readers with the platforms to generate, write and publish their own special interest stories exponentially increases readership regardless of country, culture
or language. ...
The platform uses an ‘auction’ system on which advertisers bid against each other for advertising space on facebook pages. Advertisers want the maximum potential for sales per advertising dollar
spent. Facebook’s Artificial Intelligence system is able to determine which advertisements users are most likely to view and convert to purchases. Each view of an ad, or click on an ad, or a conversion to a sale generates profit
for facebook.
While facebook is highly monetized, the additional platforms of WhatsApp, Instagram, Messenger, Messenger Rooms and Shops each act to
- draw additional users into the ecosystem,
- increase the amount of time or exposure existing users spend in the ecosystem
- provide future ‘advertising’ space which facebook can monetise.