A New Tailwind for Facebook Stock
Several months ago, I wrote about a new top-secret facility at Facebook Inc (NASDAQ:FB) called “Building 8,” but its impact was still unknown. At the time, I wasn’t sure how Facebook stock (FB) would be affected by this new division. A recent acquisition put everything into perspective.
The social media giant has bought a little startup known as Nascent Objects. It is a hardware electronics maker, but with a twist. Nascent uses 3D printing to create “modular electronics,” meaning you get to customize your devices by putting the various pieces together (like Lego).
Want a camera? Click it into place. Need extra space? Attach an extra memory card holder. Companies have wanted to popularize this kind of modular tech for a long time, but Facebook might be the first one to actually make it happen. Not only could this send FB stock surging, but it actually changes the core nature of Facebook stock. It’s not just a social media investment anymore.
FB stock is also a hardware electronics play now. “Building 8” is ground zero for this transformation. It is where Facebook will innovate on the hardware front, designing and building products that we haven’t yet dreamed of.
In many ways, we’ve been converging toward this point for a long time. Facebook has quietly amassed a ton of products to layer over its social media apparatus. Many could become cash cows. For instance, they’ve made it possible to send money through “Facebook Messenger.” You can order (and pay for) a pizza through Messenger, or even call for an Uber car. And that’s only the beginning.
Facebook has also led the charge on virtual reality (VR). If you haven’t heard of VR yet, then pay close attention. Goldman Sachs Group Inc (NYSE:GS) estimates that the industry could be worth $80.0 billion three-and-a-half years from now. By capturing even 25% of that market, Facebook Inc could set itself up for a huge surge in revenue. This top-line expansion is likely going to be a valuable tailwind for Facebook stock.
FB Stock and Virtual Reality
Facebook had a giant head-start in the VR space because it bought Oculus VR, LLC, the company that single-handedly brought virtual reality back from the grave.
No one was trying to build a virtual reality device; no one except Palmer Luckey. He was a 17-year old kid in California who wanted to fulfill his childhood dream of putting on a headset and falling into another world. Miraculously, he succeeded. After getting his company off the ground through a Kickstarter campaign, Luckey followed it up with investments from two major venture capital firms.
One of the capital firms, Andreessen Horowitz, was an early investor in FB stock. The firm showed the VR device to Facebook CEO Mark Zuckerberg and he was simply blown away. Zuckerberg understood the immense potential of Oculus VR, so he flew to Irvine, California where the company was headquartered. The story of that meeting has become the stuff of legend in Silicon Valley. (Source: “Why Facebook’s $2 Billion Bet on Oculus Rift Might One Day Connect Everyone on Earth,” Vanity Fair, last accessed September 20, 2016.)
Any normal CEO would have been over the moon to receive Zuckerberg at one’s office. But Luckey just walked up to him, shook hands, and said: “I’m a big fan, but I actually have to get back to work.” With that, he returned to making a product that could prove to be more revolutionary than the “iPhone.” Rather than being offended, Zuckerberg was impressed. Maybe he respected the work ethic, because days later he offered $2.0 billion to buy Oculus VR. Of course they took it.
Since then, Facebook stock has banked hard on the potential of VR. The company’s earliest version of the “Oculus Rift” headset was targeted toward gamers. Pre-orders showed that there was overwhelming demand. Facebook also built a cheaper version for Samsung Electronics Co Ltd’s smartphones called the “Gear VR.” It costs about $100.00. It’s been an incredible pivot for Facebook, but this kind of diversification has big implications for FB stock.
What This Means for Facebook Stock
At the moment, Facebook stock relies too much on advertising revenues. More than 96% of its top line was made up of advertising dollars, with the remainder coming from payment fees. I expect the payment fees portion to increase, but Facebook needs to spread its eggs into even more baskets.
What happens if the advertising industry has a downturn in spending? It’s not unheard of for that industry to pull back in the event of a recession, so FB stock needs to be prepared. Insulation is required; diversification is a must.
That’s what “Building 8” is all about. It’s helping the company balance out its risk profile, while also solidifying its presence in customers’ day-to-day lives. Judging by the success of Oculus (and the acquisition of Nascent Objects), Facebook has the engineering chops to pull it off. The question is whether it means bigger gains for Facebook stock.
For me, it’s a no-brainer. In one fell swoop, the company limited its risk and guaranteed a surge in revenue. To my mind, that makes “Building 8” an obvious tailwind for FB stock.