Facebook Inc.'s Most Undervalued Asset: Groups?

Facebook's Groups feature doesn't get much attention. But investors shouldn't underestimate its importance.

Mar 30, 2014 at 1:04PM

There are a number of ways to share on Facebook (NASDAQ:FB). While the media typically focuses on the action in the News Feed, another form of sharing on Facebook is booming: Groups. In fact, Groups is arguably Facebook's most undervalued asset.

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Facebook. Image source: Facebook's Newsroom.

A growth opportunity
Facebook calls Groups one of its "core products" and says there are now 500 million people using the feature every month. That's about 42% of Facebook's total monthly active users.

What is Groups? There's a good chance you've used it before. But if you haven't, it "it provides a private space for sharing with small groups -- like your family, close friends, or a sports team -- or for larger communities like schools or even companies," Facebook explained in its fourth-quarter earnings call.

Though Groups doesn't get much attention from investors, it's a big opportunity for Facebook. "A lot of the new growth we see is coming from giving people the tools to share with different size groups of people," Facebook explained in the fourth-quarter earnings call. And there's still untapped growth drivers for the feature, especially if Facebook breaks it out as its own identity, like it did with Facebook Messenger. "[G]iving experiences like [Groups] room to breathe and really develop to be their own brand, I think, is a huge and valuable thing," CEO Mark Zuckerberg said.

Fb Hacker Way

It appears plans for a new app are now under way. In a recent "hackathon" to kick off Facebook Creative Labs, a project in which Facebook is focusing on creating new apps to support different ways people want to connect and share, Zuckerberg told Bloomberg Businessweek that 40 ideas emerged from the event. One of the ideas, he suggested to Businessweek, is built for Facebook Groups.

A competitive advantage
But Groups is more than a growth opportunity for Facebook. It also plays a key role in the company's greatest competitive advantage: swarms of daily active users. The best indicator of the health of almost any social platform is not monthly active users -- it's daily active users. When it comes to daily active users, no social platform even comes close to Facebook. In Q4, Facebook reported 757 million daily active users, or about 62% of its monthly active users.

Facebook's incredibly active network serves as its greatest competitive advantage, creating a network effect that keeps members coming back. And products like Groups are one of the tools that give members on Facebook a way to connect for other purposes than to just share updates to family and friends. Groups enables Facebook users to create their own environment for sharing. Whether large or small, every group a Facebook user joins is another incentive for him or her to share and communicate more frequently.

Facebook's active Groups feature is a valuable asset, providing growth opportunity for further engagement and also reinforcing its network effect. Groups is another reason Facebook investors can count on the service to endure for years.

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Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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