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Dilantha De Silva
Dilantha De Silva
Articles (102)  | Author's Website |

Why Facebook Shares Could Have More Upside

3 recent developments lead me to up my estimate of the company's fair value

May 20, 2020 | About:

Facebook Inc. (NASDAQ:FB), the largest player in the global social media industry, is one of the few companies that have weathered the recent storm in global capital markets. According to data from GuruFocus, shares are up 5% this year, which is not a bad outcome considering the turmoil in U.S. equity markets that saw shares of some companies shedding more than 50% of their market value.

This performance was fueled by the strong financial performance in the first quarter, but Wall Street analysts are expecting the second quarter to be one of the worst periods in recent memory for Facebook. The expected contraction in the global advertising industry is at the center of this expectation.

During this volatile period, Facebook executives have continued to focus on long-term opportunities. In the midst of this, there are three noteworthy developments that deserve the attention of investors.

The investment in Jio

On April 21, Facebook announced an investment of $5.7 billion in Jio Platforms Limited, a subsidiary of Reliance Industries Limited (FRA:RLI), for a stake of 9.99%. This investment is expected to accelerate the monetization process of WhatsApp.

Jio is the largest telecommunication operator in India. What is more noteworthy to mention is that Jio entered the Indian market only in 2016. In other words, the company has risen to the top in less than four years.

At the center of this growth story is its focus on providing an unparalleled experience to customers who were not previously served by other network operators. For instance, in 2018, the Wall Street Journal reported that Jio was tapping into small business markets in rural areas of the country that had no way to connect to the internet. The company was quick to identify this underserved segment and, in a bid to gain traction, Jio introduced low-cost packages. Going a step further, the company introduced a novel mobile device named “JioPhone” for a meager price of just $10. Despite this low price, the device enabled users to connect to the internet. All these initiatives and strategies played important roles in Jio’s journey to the number one spot in India.

Facebook’s strategy will be to capitalize on Jio’s popularity among small business owners in India to generate revenue from the WhatsApp Business. Since launching last year, this new feature of WhatsApp has already attracted more than five million businesses globally and more than a million in India. In February, the National Payments Corporation of India approved WhatsApp Pay, the novel payment solution offered to business customers, to rollout payment features to 10 million users across the country. This would be the first phase of the launch of WhatsApp Pay. The objective of the company is to position WhatsApp similar to WeChat in China, which is used by millions of businesses to complete the entire business process online, from marketing to accepting payments.

If WhatsApp Pay becomes a success in India, which it seems likely to, the company will almost certainly consider a global rollout to capture the market share of the booming online payments industry.

A few months ago, investors did not have a clear idea as to how the company planned to monetize WhatsApp. However, things have taken a dramatic change, and the day Facebook generates income from this messaging platform is not far away.

The launch of Facebook Shops

On May 20, the company announced the launch of Facebook Shops, an online marketplace to help small businesses reach a better and bigger audience. This is another indication that Facebook is increasingly leveraging the strength of its platforms to unlock new avenues for income.

The timing could not have been any better. Brick and mortar stores are struggling to remain solvent and the global lockdown has pushed many of these companies to the brink of bankruptcy. Entrepreneurs across the world are realizing the importance of having an online presence, and the record earnings of Shopify Inc. (NYSE:SHOP) in the first quarter is proof that many companies are taking their businesses online to prepare for future pandemics and other global disruptions.

Facebook Shops will be integrated with the business profile pages of companies. Users will be able to browse these stores, select products and pay for the selected items either on a third-party website or on the Facebook platform itself. The company is planning a launch of a similar marketplace on Instagram as well. In the long term, the plan would be to emerge as the go-to technological solutions provider for small businesses in every corner of the world.

For now, advertising accounts for the bulk of company revenue. However, as Facebook Shops gain traction, a new stream of income will come from e-commerce.

The rollout of Messenger Rooms

The lockdown has been a major catalyst for video conferencing platform operators such as Zoom Video Communications Inc. (NASDAQ:ZM). Facebook has realized the massive opportunity in this industry. There is significant uncertainty regarding when social movement patterns will return to normal.

On the other hand, many companies have already hinted at allowing employees to work from home through the end of the year, if not longer. These companies include Twitter Inc. (NYSE:TWTR) and Alphabet Inc. (NASDAQ:GOOG). It’s reasonable to assume that the stay-at-home economy will gain traction in the next few years, leading to strong demand for video conferencing applications. According to Global Market Insights, the industry will be worth over $20 billion by 2024.

Source: Global Market Insights

Messenger Rooms, the latest group video calling feature, was launched by Facebook in April to capture a share of this booming market. With the billions of users who are active on the platform, it will only be a matter of time before this new platform gains traction among existing users. For now, personal users will be the target of the company, but the focus might shift to corporate clients in the future.

Monetizing this new platform remains a distant reality. However, the strategy of the company has always been to delay monetizing its platform until the product is adored by millions, if not billions, of users.

Takeaway

Facebook is capitalizing on its market-leading position to expand into new business lines. Small businesses are at the center of this changing business strategy as Facebook works to transform its social media platforms into a marketplace connecting consumers and merchants. There are three reasons I believe that this is the right strategy:

  1. Facebook, WhatsApp and Instagram have more than a billion daily active users each. These are all potential consumers.
  2. All the social media networks owned and operated by the company have a wide global reach.
  3. Many small business owners will consider establishing an online presence to protect against pandemics and other future scenarios of social movement restriction.

In an article published on GuruFocus in December, I estimated the intrinsic value of Facebook at $276 per share. However, considering the recent developments, I have revised my revenue growth projections upwards for a fair value estimate of $312 per share, which indicates an upside of 36% from the market price of around $230 on May 20.

Disclosure: I own shares of Facebook.

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About the author:

Dilantha De Silva
I am an investment professional with 5-years of experience in financial markets. I specialize in U.S. equities and incorporate a top-down approach to identify developing macro-level trends and the companies that would benefit from such trends. I am a strong believer that the best investment opportunities could be found in under-covered equities.

I currently work with leading financial publications including Refinitiv, Seeking Alpha, ValueWalk, GuruFocus, and TradeGrill to produce investment-related content.

I'm a CFA level 2 candidate and an Associate Member of the Chartered Institute for Securities and Investment (CISI, UK). During my free time, I enjoy reading.

Visit Dilantha De Silva's Website


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