Facebook Inc - Ordinary Shares - Class A

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Why Facebook May be the Greatest Innovator in the World



Fundamentals

Written by Ophir Gottlieb, 10-21-2015


Updated 10-23-2015
Facebook just broke an all-time high today and now has a market cap of $288 billion. The company just announced that it has indexed 2 trillion posts, strengthening its search capabilities which is a direct competitive move to compete with Google's (Alphabet) core search business as well as Twitter's news product and 'Moments.' Vice President of Search, Tom Stocky said:

"With over 1.5 billion searches per day and over 2 trillion posts in our index, search is an important, long-term effort at Facebook."
Source: TheStreet.com


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A part of this wild ride higher is the wave of new highs coming from other tech giants Google, Amazon and Microsoft. Of course, the real news comes out on November 4th, when the company releases its own earnings. The short-term could be bumpy, but over the long-run, Facebook is a breathtaking company. Check out some amazing visuals, and then we'll get into the guts of the incredible innovation coming our way.

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Cool Visual #1
While Facebook's revenue pales in comparison to the other seven companies with market caps above $275 billion, its revenue growth is equally absurdly large. Here's an image with revenue plotted on the x-axis and revenue-growth plotted on the y-axis. Note that FB is in the upper left hand side.



Of all the largest firms in the world, Facebook may very well be in place to show the greatest growth of all mega cap technology firms and is easily innovating communications at a level not seen in nearly a century.

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Cool Visual #2
If we adjust the chart above, only look at revenue growth and then isolate it only to technology firms, and broaden the population to companies over $100 billion, we see that Facebook's revenue growth is absurdly large even with a larger population of peers.



I've highlighted AAPL, GOOGL, AMZN and MSFT for points of reference.

Now, here's why Facebook has nearly unlimited upside, and I warn you: Get ready to get bullish, because these are the facts, and they are not disputed.



Oculus
"One hates to be all breathless, but the ability for two people on opposite sides of the planet to feel like they are physically in the same room could represent one of the biggest changes in communications technology in years, maybe decades."



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Why Facebook Stock Could Double
Facebook Proper: Facebook has more "customers" than any company has ever had -- topping 1 billion users in a single day and averaging 1.5 billion monthly active users. And friends, this is all without any access to China.

Facebook of course is not just the app / website Facebook, it is a company created and manicured by tech genius Mark Zuckerberg. As we walk through the wonderful things happening at Facebook, let us never forget, that much like Apple of yester-year, this company and its future sit squarely on its founder's back, with all of its weight. He is the difference maker. A bet on Facebook is a bet on Mark Zuckerberg. Period.

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Where is the Growth Going to Come From?
First, Facebook proper is growing revenue at nearly 50% a year. Here's the company's all-time revenue chart (TTM).



Second, Facebook is continuing on with a plan to launch solar based drones to hover over remote areas of planet Earth to provide Internet access. "Only" 37% of the world is on-line and Facebook has a plan to reach the unserved market. More on that in a bit.

That might sound crazy, foolish, useless and desperate. Or, it could sound like Mark Zuckerberg is going to crush doubters again. If he is able to connect a chunk of the remaining 5 billion people in the world, the stock could double in a matter of years and near half a trillion dollars.

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Third, WhatsApp which is the second largest social media in the world at 900 million active users and that's a gain of 100 million MAUs since April and more than double its user base from just over two years ago (Source: The Motley Fool).

Fourth, the third largest social media and second largest messaging app in the world is none other than Facebook Messenger, which has over 700 million monthly active users.

Fifth, of course, there's Instagram and its 400 million users (of which 75% are from outside the US).

Sixth is Oculus, which I will discuss in detail, below.

Instagram
While some are concerned about how WhatsApp can actually monetize its 900 million users, Instagram is making substantial progress on that front. According to Axiom Capital Management's Victor Anthony ads on Instagram just started and major brands like Wal-Mart (WMT), McDonald's (MCD), Toyota Motors(TM), Capital One Financial (COF) and Whole Foods (WFM) have become ad buyers.

"Based on reasonable assumptions of user growth and monetization of those users, we see Instagram generating only $102M in advertising revenues this year, ramping to $284M in 2016, and ramping to near $4B annually by 2020."
Source: Barron's.


That $4 billion estimate would represent about 30% of Facebook's revenue today. Tim Brugger of The Motley Fool estimates $700 million in revenue from Instagram in the next year which is wildly higher than the ~$300 million estimated by Axiom Capital.

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WhatsApp and Connecting the World
This is where it gets crazy interesting and crazy bullish. First, we need to understand what this "WhatsApp" thing is, so here we go, quick and dirty:

WhatsApp is designed as a replacement for SMS (text messaging) and it's working. Because it's designed as a simple messaging app, WhatsApp works on a wider variety of phones than Messenger, including connected feature phones, which use slimmed-down versions of popular apps (Source: The Motley Fool).

Now, Internet.org is the Facebook-led initiative to improve Internet access and mobile device usage in developing countries (like India). That's where the solar drones fit in. Here's how it works:

"Facebook partnered with wireless carriers and offers free access to certain apps without their usage counting toward data plans. That process, known as "zero rating" apps, encourages customers to use apps like Facebook and Messenger as much as possible."
Source: The Motley Fool


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WhatsApp is not on that free list, but that's a yet. It's the largest messaging system in the world, and has a massive usage from developing countries, like India with 70 million. Now that WhatsApp is knocking on the door of 1 billion users, Mark Zuckerberg has pretty clearly stated, that there is a clear path to monetization. Here are two:

First, WhatsApp could introduce new paid features that would let businesses message consumers. That's a clear line of revenue.

Second, WhatsApp already charges nominal annual fee of $1 after the first free year. At a billion users, that's no joke. The one caveat here is that Facebook only charges users in North America and Europe -- so far it has left the underdeveloped countries out of the fee system.

In any case, it's rather obvious that there will be a substantial monetization plan, even if it has not been fully fleshed out yet.

Facebook Messenger
Keeping it rather brief, Messenger has evolved into a platform for peer-to-peer payments, apps, and perhaps most importantly, social games. Its payment app competes squarely with PayPal's Venmo. The Motley Fool does a bang up job on describing how FB Messenger can be monetized, here's a snippet:

"Facebook's long-term goal is for Messenger to evolve into a monolithic chat app like Tencent's WeChat (known as Weixin in China), which has 549 million active users. Last year, Tencent let retailers set up "mini shops" within the app and launched a "Game Center" for in-app installations of games. Last quarter, Tencent reported that gaming revenue from WeChat and its other chat platform, QQ, boosted its online gaming revenue by 28% annually to $2.15 billion."
Source: The Motley Fool


Keep in mind, if King Digital or Zynga release their games simultaneously in iOS, Android and Facebook's "mini-app" store, that's an immediate competitive stance by Facebook against Apple's app store. After all, if a game is purchased through FB, there's no need to download it (again) for your phone. That's big revenue from multi-billion dollar gaming companies.

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Oculus
I may have left the best for last. While Instagram, WhatsApp and Messenger each are at various stages of monetization, the 800-pound gorilla in the room is Oculus. The virtual reality hardware unit is supposed to ready for mass distribution in early 2016.

Oculus is the fully immersive 3D headset that Facebook purchased for $2 billion. Not only is Facebook aiming at changing the way gaming is experienced, but well beyond that, the firm has its sights set on the way we consume all media, especially movies and television. But the hardware isn't the crown jewel, its Facebook's app that goes with it.

Without going into too much detail, at E3 the public was exposed to the Facebook Oculus app inside the headset and as Dave Thier of Forbes tech said:

"It was the sense of being in the same virtual space as someone else.

[] One hates to be all breathless, but the ability for two people on opposite sides of the planet to feel like they are physically in the same room could represent one of the biggest changes in communications technology in years, maybe decades.

[] Add in things like cameras that can read and replicate facial expressions, avatars and more natural looking environments, and this is a technology whose consumer base looks increasingly like [all of] humanity." (Source: Forbes).



Benzinga published an article on Sep 11th, 2015 referencing Ross Sandler of Deutsche Bank:

"Sandler pointed out that the consumer version of Oculus is expected to begin shipping to consumers in the first quarter of 2016 and could sell 1.5 million units at an average price of $350 per device. As such, Facebook could see sales of $578 million which represents 3 percent of total revenue.

Sandler also added that it is likely Facebook could sell the devices at a 50 percent margin. While this would imply an incremental $250 million in COGS (cost of goods sold) to the company next year, it only represents 3 percent of its total 2015 COGS.

Looking past 2016, the analyst is estimating total Oculus revenue of $599 million in 2017, $751 million in 2018, $905 million in 2019 and $1.063 billion in 2020."
Source: Benzinga


With Oculus we will be connected at a level that until recently, was truly just a sci-fi movie gimmick. Now, it's going to be real and ready for mass market next year.

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Conclusion
Facebook's revenue, net income, free cash flow and research & development are all up year-over-year. It owns the three largest social media properties in the world, and that's not even to speak of Instagram. The company will power the Internet for the rest of the undeveloped world, then provide the populus with the apps that can run on the technology available to them.

The firm will radically change the way we communicate with our friends and families with Oculus, not even to mention gaming. When we combine Facebook proper with WhatsApp, Facebook Messenger, Instagram and the promise that is Oculus, Facebook could call more than half of the Earth's population a customer and that's while still being locked out of China.

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