Fab Fundamentals Fortify Facebook's Fiscal Future
Posted by Tom Foremski - May 31, 2012
Matthew Buckland, editor of Memeburn, argues that the focus on Facebook's [$FB] share price collapse, is a distraction from the many positive factors that will shape its future. He owns shares in Facebook.
In confusing times like these, when there is a cacophony of conflicting reports and opinions around investing in Facebook, I like to go back to the fundamentals. Fundamentals cut through hyperbole and understatement because they are just that: fundamentals.
Instead of the current share price consider these key points:
Facebook is massive. The social network now boasts almost one-billion registered users, it's the second biggest site in the world, after Google.
Facebook has the best demographic data. Other platforms only dream about what Facebook has: the most detailed and freshest demographic data, allowing advertisers to match advertising to users' interests. Advertising often comes across as a nuisance, but the reality is that we actually want to be advertised to if it's relevant. Facebook can potentially target advertising like never before. Suddenly advertising becomes useful, and I want it. Who would have thought?
Social beats search algorithms. As a filter, social (what our peers think) is increasingly winning over the algorithm (what computers think I think). We're a long way off from a computer thoroughly understanding context and meaning (especially sarcasm). Social is the best filter we have at the moment for sorting through digital crap.
A clone-free future. Unlike Groupon, which has had a spectacular fall on the stock market, Facebook is a difficult business to replicate. There are hundreds of thousands of little Groupon clones, some that now possibly do an even better job than Groupon itself, chipping away at what was once an original idea. Facebook, which owns a unique network, is one in a million and difficult to replicate.
Magnetization will come. Just look at the outrageous revenue success of TenCent in China, a portal-come-Instant Messenger-come-social-network-come-gaming-site. This Internet giant has managed to Mounties everything from advertising space to freemium services selling Avatars to its users. At the beginning of this quarter TenCent announced US$1.5-billion in revenues, a healthy 21% increase over the last quarter of 2011. Facebook hasn't yet touched these areas of magnetization.
Global advertising will continue to move online. According to Facebook's roadshow slides, the global advertising market is currently dominated by print (US$138bn) and TV (US$193bn), with online advertising at US$68bn and mobile advertising US$1.5bn. There is a huge print budget for Facebook to tap into as it continues its slow decline.
The Microsoft link. Let's not forget the Microsoft connection -- that tiny, strategic 1.6% stake. It forces these massive tech giants to think of each other, to occasionally work together and it is an alliance that could be fully activated in the future to take over the world.
Lots of advertising success stories. We know that GM pulled its advertising from Facebook, but there are countless success stories, such as the claim that for every US$1 that the world-famous ice cream Ben & Jerry's spends on Facebook it gets back US$3 back. The ice cream maker has around about 3.4-million fans on Facebook.
Columnist Larry Magid in summed it up perfectly :
"I don't know what Facebook is worth today, and I don't care. Because that type of short-term thinking has nothing to do with what it takes to build a great company... When I look at Facebook, I don't think about price-to-earnings ratio, but of how it's changed the world for both better and worse, and how nearly a billion Facebook users are using it to enhance their lives and the lives of those they care about."
Whether Facebook's ads are performing to their optimum or not does not concern me. The fundamentals are there, and the company has plenty of time to tweak, innovate, and adapt its business model. Buying shares in Facebook is a long-term bet on those solid fundamentals.
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