Facebook Inc - Ordinary Shares - Class A

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Why Facebook Could be Worth $1 Trillion



Fundamentals

Written by Ophir Gottlieb, 12-06-2015


PREFACE
Facebook has developed a collection of technologies whose consumer base looks "increasingly like all of humanity."



STORY
Facebook Proper has over a billion daily active users and is growing nearly 25% year-over-year. Facebook has more "customers" than any company has ever had, and friends, this is all without any access to China.

And, while Google is seeing lower advertising rates and making up the difference on volume, Facebook has seen its mobile advertising rates increase by more than 60% year-over-year and has actually cut the volume of ads while exploding revenue.

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Further, the company has 900 million users on WhatsApp, 700 million users on Facebook Messenger and over 400 million users on Instagram. Here's an all-time revenue chart.



We can see the company has generated just under $16 billion in annual revenue and its growing 42% year-over-year, which is absolutely absurd considering Instagram, WhatsApp and Facebook Messenger have yet to be monetized. That's right, the three other colossal social media properties that Facebook owns are just now about to generate revenue.



To add some context to that "absurd" growth, we have plotted all technology companies larger than $50 billion in market, equal spaced them (ranked) on the x-axis and plotted revenue growth (one-year) on the y-axis.



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We can see Facebook is outpacing everyone, and it's really not even close. Just wait until Instagram, WhatsApp and Facebook Messenger enter the fray. But again, that's not the story.

INNOVATION
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. Here's a chart that plots research & development expense for every dollar of total expense on the y-axis with the same large cap technology peer group equal spaced on the x-axis.



This is the beginnings of the impossible journey we are about to embark on but let's get one fact straight. Facebook spends more on R&D per dollar of operating expense than any large cap technology company in the world. Period.

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OCULUS
Now, here's the start of the story of 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, the virtual reality hardware unit, is supposed to ready for mass distribution in early 2016.

Facebook has its sights set on the way we consume all gaming and media, especially movies and television. But the hardware isn't the crown jewel, its Facebook's app that goes with it. At E3 the public was exposed to the Facebook Oculus app inside the headset and as Dave Thier of Forbes tech said:

"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 [] 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).

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. Oculus is just a part of Facebook's strategy to pile together assets. Here's a chart of asset growth relative to the rest of the mega-cap technology companies.



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And, if you're the strong forensic accounting type, these aren't pie in the sky asset valuations based on goodwill. Here is Facebook's book value growth through time.



That's legitimate net asset growth, or in English, the enterprise value is booming in tangible terms.

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WHATSAPP
WhatsApp 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).

WhatsApp is designed as a replacement for 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


WhatsApp is at the forefront of connecting billions of more people that don't have smartphones and is setting up to be one of the most dominant and and totally exclusive avenues for anyone in the world to advertise to lesser developed countries.

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CONNECTING THE WORLD
Jay Parikh, Facebook’s vice-president of engineering, said:
"Our mission is to connect everybody in the world."
Source: The Guardian.

Back to India, It turns out that the country's 125 million+ users make it the second largest market for Facebook. But here's where it gets insane. As of June, Facebook reported that nearly 90% of the users access the services via their mobile phones. There simply is no other service or company out there that can control this massive user base in every part of the underdeveloped world, other than Facebook’s various 'Lite' services.

Facebook has a project and plan to launch solar powered drones to beam Internet connections to the far corners of the Earth. On July 30th, 2015, Facebook showed the world its first full scale drone. Here it is:


Photograph by Reuters


Code-named "Aquila", the solar-powered drone will be able to fly without landing for three months at a time, using a laser to beam data to a base station on the ground. Facebook said it would test the aircraft in the US later this year.
Source: The Guardian.


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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, which has 549 million active users. Last quarter Tencent reported that gaming revenue from WeChat and its other chat platform, boosted its online gaming revenue to $2.15 billion."
Source: The Motley Fool

Yes, WeChat generated $2.15 billion with 550 million users in China. Facebook Messenger has 700 million users. 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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INSTAGRAM
Instagram is making substantial progress on the monetization 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.

Tim Brugger of The Motley Fool estimates $700 million in revenue from Instagram in the next year and Axiom Capital projects $4 billion in revenue by 2020.

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SEARCH
The company 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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CONCLUSION
FACT: Facebook proper is growing at a ridiculous rate for a product with 1.6 billion customers every month.

FACT: Facebook Messenger has a model to follow that should turn it into a multi-billion business and a direct competitor to Apple's app store for gaming.

FACT: WhatsApp is at the forefront of connection billions of more people that don't have smartphones and is setting up to be one of the most dominant and and totally exclusive avenues for anyone in the world to advertise to lesser developed countries.

FACT: Instagram has more users than Twitter, it's growing, and forecasts call for revenue of over $4 billion in a matter of years.

FACT: Oculus is aimed at being the greatest change in communications technology ever. Period.

FACT: Facebook's solar drone program aims to connect the company to another 3 billion people, giving it half of the world as a customer base.

FACT: And there's more. Facebook is moving into real-time video capability for every user (like Periscope, but ya know, with 600% more users).

FACT: Facebook is getting into search to challenge Google.

Facebook has just begun and the end very well may be a company worth a trillion dollars with half of the world as its customer base.

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