Many investors were scratching their heads after Facebook (NASDAQ:FB) paid a total of $21 billion for messaging app WhatsApp and virtual-reality company Oculus. However, this strategy is nothing new. Many tech companies have acquired smaller players in hopes of finding the next big trend, and Mark Zuckerberg could be on to something with these acquisitions.
How making "surprising" acquisitions can pay off
Google (NASDAQ:GOOG) is a tech company that has used acquisitions to find the next big thing. Back in 2005, the search company made what seemed to be a head-scratching purchase of Android. Since then, Google has grown Android into the largest mobile operating system on the planet. It also hit the jackpot with its YouTube purchase in 2006. Google bought YouTube for less than $2 billion. It's said that YouTube is valued at more than $20 billion today.
Many of the major tech companies are trying to figure out what the future of computing will be. Facebook is making a big bet that virtual reality will be the next social platform. While the acquisition won't add revenue over the near term, it's more of a long-term bet. Think of it as an option play on virtual reality. And while Oculus' main feature is its headset, Facebook believes the future will be in generating revenue from software, including the opportunity to advertise in the virtual-reality space.
One of Facebook's biggest rivals for online ad spending is Twitter (NYSE:TWTR), which is making its own bets. Most notably, Twitter is attacking the "second screen." Twitter wants to be an interactive tool for those watching TV. Already, there are a large number of users watching TV and simultaneously tweeting about it. Last year, Twitter made its largest acquisition to date, buying a social TV company. Ultimately, Twitter could be able to attract ad dollars from TV companies. That's would be a big opportunity, as TV advertising continues to be the largest medium for ad spending in the U.S.
Facebook's acquisitions won't negate its other successes
Whatever its future plans, Facebook is a social networking powerhouse with a strong presence in advertising. As money continues to flow into online advertising, both Facebook and Twitter should be big winners. eMarketer expects mobile advertising to reach $63 billion by 2017. Compare that to $18 billion spent on mobile ads in 2013. Over that same time period, Facebook's market share is expected to grow from 18% to 24%.
Investors should take note of the success Facebook is already seeing on mobile. Not to mention the fact that Instagram continues to grow nicely. Last month, Facebook hit 1 billion monthly active users on mobile, up from 945 million at the end of 2013. At the same time, Instagram was up to 200 million active users, compared to 150 million during the fall of 2013. Facebook is also still very early with its strategy of video advertising.
Facebook is still one of the more expensive names in the tech industry, albeit not as expensive as Twitter. Twitter's price-to-sales ratio is north of 25, while Facebook's is below 15. And while Twitter is looking to tap a very large TV market, it appears that Facebook is a bit more forward-looking. The company is actively trying to make its social network more interactive. Virtual reality could go a long way toward doing so. It will take some time before we know if Oculus can do for Facebook what Android and YouTube have done for Google, but it's a bet that Facebook needed to take.
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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (C shares), and Twitter. The Motley Fool owns shares of Facebook and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.