I never thought I’d say this, but given the recent turnaround in price in the middle of a media-hyped scandal, the long-term viability of Facebook (FB, Financial) remains intact. In fact, I still kick myself for not buying in when a family friend (who’s owned Berkshire since the '60s) mentioned Facebook at a wedding in 2012. The stock had been cut in half since the initial public offering and was trading below $20 a share. Today, it’s priced above $160 a share and is generating profits at a torrid pace.
The advertising platform still offers the best value for the attention, and from a recent scroll through Instagram, Facebook has become even more focused on revenue generating activities there too. Money flows where attention grows. Facebook reached scale rather quickly and now will need to monetize the 2 billion monthly active users in other ways.
By contrast, Amazon has 310 million active accounts, but has figured out a way to get people to stick around via Prime membership services, Alexa products and prices that aren’t that much cheaper than most brick-and-mortar retailers. Eventually, Facebook will have to be more than just a platform for highly targeted advertising. Otherwise it runs the risk of becoming an old technology company that no one cares about.
That’s why investors should be getting excited by Facebook’s other offerings. Workplace just passed 2 million paid users. Oculus, the virtual reality glasses firm owned by Facebook, accounted for over 25% of the entire VR market, shipping close to 500,000 units in the third quarter of 2018. Entertainment, especially live sports, will continue to use virtual reality to enhance user experience. The NBA already has courtside seats available on NBA League Pass for most VR headsets. And, it’s only going to get better. Remember when no one thought much about watching streaming video on the internet? Yeah, exactly.
From a valuation standpoint, investors should have already been buying since October, but the stock still trades at just 21x forward earnings, and Facebook spends less than 60% of its income on capex, versus 86% at Google. Thus, it could catch up to the search engine giant in the coming decade. In the next five years, barring the skyscraper curse coming into fruition in 2020, Facebook should be one of five companies valued above $1 trillion, and from there (thanks to inflation) it could double again before too long.
Disclosure: I am not long or short any stock mentioned.
