If I could buy any stock in the world…. (Part 1 of 2)

avatar By: IS
Date posted: 10.13.2010 (5:00 am) | Write a Comment  (10 Comments)

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I’ve been looking at things closely and I’m starting to be a big time believer… Believer in what you ask? In Facebook. Not just that it is a major social web player, one of the biggest tech companies in the world, the largest private company in Silicon Valley. But I also believe that Facebook’s current valuation makes it the most undervalued stock out there right now. Recently, venture capitalists Paul Buchheit and Peter Thiel declared that Facebook would be worth more than Google (GOOG) at some point. And I don’t think they are being negative about Google. You all know that I foresee huge potential in Google’s stock in the long term. But Facebook is looking more attractive every day as it adds features, photos, videos and users, many users.

I wrote about one choice a few months ago… owning Facebook or one fifth of Google (yyy). Now I have to say that the two venture capitalists that gave this opinion are both Facebook shareholders which probably makes it difficult for them to be objective.  Let’s look into what Facebook represents and what it will be (or could be) a few years from now.

2010 Facebook

The one thing that everyone knows is how popular Facebook is. It reached 500 million users earlier this year and is dominant around the world. There are a few countries where Facebook is not yet the #1 social network such as Japan, Russia, Brazil & India but even in those countries it still has a fairly important presence. The best way to see it is to go out in a bar or any other event. Meet someone and as you leave, see how the conversation ends. It used to be an exchange of phone numbers. Now, it’s just a mutual agreement to “friend” each other on Facebook. The question: “Are you on Facebook” does not really even get asked anymore. If you are under 40, everyone just assumes you are.

Users

That has helped Facebook become one if not the most important websites on the internet. Users now spend 6 hours per month on average scrolling through messages, friends’ profiles, videos, pictures, etc. That makes Facebook the website where users spend the most time, more than Yahoo, Google or any other site for that matter. It has also helped Facebook become a major player in segments such as photos and videos. In fact, Facebook is now the #2 website in the world for videos behind Youtube which is quite impressive considering for how long it has been promoting them.

Advertising

Due to the fact that users spend more time on Facebook then anywhere else, it has become the “Every day Super Bowl” for advertisers. One of the reasons why the Super Bowl is such a big event for advertisers is because it is a unique opportunity to reach over 100 million people (106 million people watched last year). Facebook is not exactly the same because users are not “looking forward” to ads. But it is a unique platform for brand advertising with about 165 million users in the US. Countless advertisers are working on Facebook material that can be distributed in a cheaper and more efficient way than through traditional media. It is still in the initial phases but companies such as Nike and Pepsi have had great success through Facebook advertising.

Social Gaming

We have discussed Zynga a few times on this blog. If you are not aware, Zynga is a gaming company that has adapted perfectly to this Facebook world. They have built games that are played alone but in an environment with your Facebook contacts. Not clear? Imagine building a farm where you take care of animals and take care of your crops, etc. What Zynga did was that it added the social aspect to the game. Now, players can share their progress with their Facebook contacts, see their friend’s farms, and help each other by doing business together and many other things. It has been a game changer and there are many other possibilities being explored. Sports fan? Manage your own sports campus, where you will compete for budgets, fans, ticket sales, signing players and even in games themselves. The possibilities are endless but Facebook seems to be the only viable option for social gaming at the moment.

2015 Facebook

Web directory/Search engine

Facebook started using it’s “Like” button across the web a few months ago and the most obvious use for it was for friends to share web pages or anything else they can find with their friends and family. That feature is slowly being included into a much bigger project as Facebook recently launched a “Page Browser”, which is being rolled out. What it will become is not quite clear obviously but a lot could be done. If you have read the “Tipping Point”, you know that a few individuals can have a huge impact on trends and other successful products/websites. Facebook is by far the top source to know who the “influencers” are and could give more power or influence to things that are “liked” by these users. There is no doubt that Facebook will be building something powerful in that space although it’s not clear to me that it will be a “search engine”. Google might still be the king of search but I would imagine that surfing the web will not only be done through search but increasingly through social recommendations.

Electronic Payment system

One major point that we have discussed but that few are considering right now is the Facebook currency system that is gradually being implemented. Since Facebook is on an even larger scale than phone powerhouses Google and Apple, it very well might end up that Facebook that will end up providing an alternative even upgrade to eBay’s (EBAY) Paypal. There is a lot of money to be made and Facebook has a strong way of entering the market. While Paypal had used eBay’s auction business to achieve penetration, Facebook will probably use a few different methods:

-Social gaming (impressive sums of money are being spent on virtual goods, these are slowly being moved over to Facebook credits)

-Coupons from Facebook’s corporate clients

-etc

I think this could become a major source of revenues and power for Facebook if it is rolled out quickly and efficiently enough.

Default “email”

Some time ago, it made big news when Facebook executives pronounced email dead. Now that has not been the case and it will likely never happen. But communications with family and friends are increasingly taking place over Facebook’s message system rather than over traditional email. That gives Facebook access to more information about users and makes it much much more difficult to move to another platform since they need to get all of their contacts to gradually move along. It is a major point and Facebook is certainly gaining a lot of ground here.

Advertising platform

Facebook’s real value for investors lies in its ability to become the top way for advertisers to reach their targeted users. While it has begun to some extent, advertisers, agencies and even Facebook are still very much learning about the best ways to get it done. There is no doubt however that Facebook probably represents the best way for small and large advertisers to get a message, an offer or a brand across. Local traffic will become a key point and while AOL (AOL) and Yahoo (YHOO) have been putting tons of money and resources into “local”, Facebook is still miles ahead and continues to gain ground. A car dealer has a few extra cars? Why not display ads to residents within a 25 mile radius that have been discussing cars in recent weeks? This is quickly becoming a reality through Facebook and represents a solution even better than what Google can currently provide. When you consider that almost all of Google’s revenues come from advertising, this point alone could prove sufficient for Facebook to be worth more in a few years.

Phone Operating System

As useful as phones have became and as much of web surfing, gaming and reading that we now do, it remains a device dedicated to communicating with family and friends, through email, calls, text messages, Facebook messages, etc. Thus, the device remains centered around our main personal and professional contacts. Knowing that such information is the primary strength of Facebook, you will not be surprised to hear that Facebook is working on some kind of software that could eventually become an iPhone/Android competitor. It’s difficult to quantify that probability since the product is not even in beta. But I doubt anyone discounts Facebook.

Numbers

If you look at revenues, it is not even close between Google and Facebook right now. Last year, Google reported $23.65 billion in revenues while Facebook’s estimated revenues for 2010 are close to $1.4 billion. In terms of traffic, Google has a hold of almost all internet users while Facebook trails a bit at 550 million users. But on both accounts, Facebook is obviously growing very very fast…how long until it catches Google? Probably more than a decade…! But it could happen faster than you think. In 2003, Google was about the same size that Facebook currently is…

Stay tuned as tomorrow we will discuss ways to buy Facebook stock even though it is not yet a public company

More on this topic (What's this?)
A Value Investors New Take On Facebook
Smart Investments in the Mobile Revolution
Read more on Facebook at Wikinvest
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10 Comments

  1. Comment by Phoenix Water Filters — October 13, 2010 @ 7:09 pm
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    Great post! very interesting! I have just stumbled upon this blog and will most certainly subscribe!

  2. avatar

    [...] If I could buy any stock in the world…. (Part 1 of 2) [...]

  3. Comment by John Hunter — October 17, 2010 @ 9:05 am
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    Facebook has done far better than I guessed they would. I still have plenty of other things I would rather invest in (including Google, which I own). Remember the chart that shows how much time people are spending on Facebook also shows Yahoo dominated time spent versus Google and it didn’t do much for them. I do agree Facebook has plenty of good opportunities to make money – it just seems the value placed on Facebook now, is far too high. Obviously others disagree with me – so they can buy in.

  4. Comment by IS — October 17, 2010 @ 9:16 pm
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    @John -I see your point of course and do think that Google is a terrific buy even after last week’s rise. But I see a big difference in strategy between Yahoo and Facebook. I don’t think Yahoo has innovated or had a superior product, it’s just been average everywhere. Facebook seems to have a much clearer vision

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