Facebook Inc (NASDAQ:FB) stock went public on May 18, 2012, as you may know. It was not an auspicious occasion. Priced at $38.00, the opening bid for FB stock on that first day of trading was a couple of cents more than $42.00. It traded up to $45.00 that morning, but then took a sudden turn in direction.
Facebook stock plummeted some 60% between May and September 2012. One of the most common reasons cited for Facebook stock’s decline was the company’s enormous $100.0-billion initial public offering (IPO) valuation. Clearly, a company that did little more than allow people to connect with one another electronically couldn’t possibly be worth so much money.
Today, Facebook boasts more than 1.1 billion active daily users, which is about a 15% increase over the year before. In 2015, FB stock generated nearly $18.0 billion in advertising revenue and, as of the second quarter of 2016, that number is up more than 60%. FB stock has more than $23.0 billion in cash and equivalents, and Facebook stock sells in the $130.00 range. Right now, Facebook’s market cap is over $379.0 billion. (Source: “Company Info,” Facebook Inc, last accessed October 21, 2016.)
Facebook Stock: Business Model Simple and Effective
Okay. All of this is impressive. But remember, this is still a company that just connects people (and businesses) to one another electronically and puts advertising in front of them in the process, right? In my opinion, that is right. Facebook has a pretty simple, straightforward business model that doesn’t need to change much into the future. After all, Americans have had ads placed in front of them since 1704, so that’s not likely to change anytime soon. (Source: “Ad Age Advertising Century: Timeline, AdvertisingAge, March 29, 1999.)
For companies like Facebook that sell advertising, the trick is to grow the audience and keep it glued to whatever device people are staring at. So, how is Facebook going to do that? For two years now, Facebook has been working to create a completely immersive environment that will transcend our current appreciation of Virtual Reality (VR). The acquisition of Oculus is at the heart of this. For Facebook, VR represents “the next major computing platform that will come after mobile.” (Source: “Facebook to Acquire Oculus,” Facebook Inc, March 25, 2014.)
Virtual Reality: The Next Frontier
Today, you can use one of Facebook Inc’s various platforms (“Facebook,” “Instagram,” “WhatsApp,” “Messenger”) to share an image or a story with a friend. In a few years, the integration of “Oculus VR” will allow you to do that in real time, in an augmented reality (AR) that places the two of you together in a live conversation anywhere on the planet, no matter where either of you happens to be physically. (Source: “Facebook VR Shows Us Why Zuckerberg Acquired Oculus,” Popular Science, October 6, 2016.)
The VR experience that Facebook envisions goes well beyond just talking in real time. The platform will allow users to do anything that they could do if they were actually with one another, including playing cards or chess, or even fencing with sabers. (Source: Ibid.)
If VR is the next computing platform, it certainly isn’t the only thing that FB stock will be using to build its audience. In 2013, Facebook launched an artificial intelligence (AI) research lab called “Facebook Artificial Intelligence Research” (FAIR). Among FAIR’s developments is a technology that makes the social media company’s products accessible and usable for the blind, the deaf, and for people with other disabilities. (Source: “How Facebook Is Using AI to Help Bring Photos To Life For Blind,” Fast Company, October 16, 2015.)
Facebook is taking this stuff seriously. FB stock’s investment in research and development has grown from a little more than $1.4 billion in 2013 to more than $4.8 billion in 2015. (Source: “Facebook Annual Report 2015,” Facebook Inc, April 27, 2016.)
In my opinion, each of these moves will likely have a huge impact on Facebook’s ability to grow its audience into the near and distant future. The moves will have a major impact on FB stock’s ad revenues. And I would expect that they will also have a positive effect on the value of Facebook stock.