Tailwinds for FB Stock
Many novice investors make the mistake of overlooking Facebook Inc (NASDAQ:FB). They think that because FB stock has already carved out huge gains for its shareholders, it can’t possibly do it again.
It’s the “I missed the train” type of thinking. Investors feel like they got to the platform just as the train pulled away, so they hurry on to the next platform. But if they’d just stay put, another train would be along shortly.
That’s how I tend to look at companies like Facebook. They may be less nimble than in their startup days, but that doesn’t mean Facebook isn’t capable of enormous growth. It has other strengths these days—like cash, for instance.
Facebook is sitting on $20.6 billion in cash and short-term investments. What’s really impressive is that Facebook isn’t losing money. It’s been “in the black” for a long time now, earning as much as $3.7 billion in net income last year.
That means Facebook’s cash pile is getting bigger. How many of the so-called unicorn startups can say the same? Uber: not yet profitable. Snapchat: not yet profitable.
Heck, even Tesla Motors Inc isn’t yet profitable.
If Facebook was going to sit on this cash indefinitely, I would agree that it is a stale investment. But the company has shown time and again that it rejects complacency.
By building up its cash pile, Facebook is developing the resources to buy out little startups that are inventing new technologies. It wants to be at the forefront of every major technological shift in the 21st century.
It’s a division of labor works for both Facebook and millions of technology entrepreneurs; the entrepreneurs just need to keep pursuing their ideas.
Meanwhile, Facebook knows the current technology landscape. It employs some of the smartest people in the world and pays them to keep a watch for things that could change the world. When it spots a unique startup, it moves quickly to acquire the company.
This strategy has actually worked really well in the past. Facebook is engineering an endless growth cycle in which FB stock could have another two, or maybe even three, monster runs.
Here are three of the company’s buyouts that are finally starting to bear fruit:
It’s an understatement to say people were shocked when Facebook paid $1.0 billion for Instagram. There were jaws that needed to be picked up off the floor. $1.0 billion? It was a monumentally large amount to pay for a company that had no business model. (Source: “Insta-Rich: $1 Billion for Instagram,” The Wall Street Journal, April 10, 2012.)
Most people just assumed that Facebook was looking to wipe out any potential threats to its own business. After all, Facebook was a place where users could post pictures, so another photo-sharing app might threaten its business.
We were all so wrong. Facebook understands that people don’t come to Facebook just for pictures; it’s also where they wish friends a happy birthday, plan group events, and consume news. Instagram is much more photo-centric.
That’s why Facebook kept Instagram alive and well. The company’s subscriber growth has been stellar ever since it was tucked under the Facebook umbrella. It’s now even larger than Twitter, making it a major draw for advertisers.
Any company that sells products to 18- to 29-year-olds needs Instagram. Advertisers are chomping at the bit to get access to that demographic, meaning that Facebook can charge whatever it wants. Over the next few years, I expect advertising revenue from Instagram to pay for the acquisition several times over. (Source: “Facebook extends dynamic ads to Instagram after 2.5 billion products displayed,” Venture Beat, May 10, 2016.)
Facebook buying Whatsapp’s messaging app for $22.0 billion is one of those crazy business deals that will pass from history to legend. It’s the stuff of lore. (Source: “Facebook’s $21.8 Billion Whatsapp Acquisition,” Dealbook, October 28, 2014.)
Here’s the story so far as I can tell. Whatsapp’s CEO had previously rejected a $10.0-billion offer from Alphabet Inc, also known as Google. I can’t think of too many people who would reject $10.0 billion, especially when their firm has no revenue.
But Whatsapp did exactly that. Apparently, Whatsapp didn’t like the idea of Google integrating its flagship service into “Google Hangouts.” The company’s management wanted the app to have autonomy.
So when Facebook came knocking, most people assumed the same thing would happen.
But Mark Zuckerberg took the personal route. He went over to the CEO’s house and had dinner with him. Partway through that dinner, he got up and made a phone call to say the deal was done. More than $20.0 billion negotiated over dinner and a handshake.
That’s awesome, but it’s also practical. I’ve spoken to a lot of analysts and all of them agree: messaging platforms are the next frontier of advertising. Whatsapp has hundreds of millions of users, meaning it will be the biggest draw for advertisers.
Until the Oculus VR acquisition, Facebook had never dabbled in hardware (aside from the disastrous Facebook phone episode). The company was not a manufacturer by any stretch of the imagination, so why did it suddenly decide to switch gears?
The answer is simple: the “Oculus Rift” was going to change the world and Facebook would rather lead that charge than follow it. That strategy had propelled FB stock to lofty heights in the first place, so why abandon it now?
It paid $2.0 billion for the virtual reality company. Now it is releasing the Oculus to the public under the auspices of a gaming console, even though it knows VR is so much bigger than that. It will revolutionize communication as much as the “iPhone” before it. (Source: “Facebook closes its $2bn Oculus Rift acquisition. What next?” The Guardian, July 22, 2014.)
Imagine sitting in the same (virtual) room as a family member who’s on the other side of the planet or stepping into a memory filmed with 3D cameras. That future is almost here, courtesy of Facebook.