Here’s How Facebook Inc Can Still Be a Multi-Bagger

In the 2010 movie The Social Network, there's a point where Mark Zuckerberg's co-founder Eduardo Saverin is trying to convince Mark Zuckerberg to start advertising and bringing in money for the fledgling Facebook (NASDAQ: FB  ) website. The idea incenses Zuckerberg, who thinks ads will ruin the experience.

Later in the movie, Sean Parker—founder of Napster—captures Zuckerberg's thinking when he says:

 "The Facebook is cool; that's what it's got going for it. You don't want to ruin it with ads because ads aren't cool. It's like you're throwing the greatest party on campus, and someone's saying it's got to be over by 11."

 

The quote captures exactly why investors were so wary about Facebook ever succeeding, and exactly why the company has proven those naysayers wrong.

Zuckerberg's playing a different game, but all parties can win
One thing that Mark Zuckerberg has gone to great lengths to explain is the purpose of Facebook. It is not a business that connects people in order to make money. It is a company that makes money for the purpose of creating a more open and connected world.

At some point, supporting the infrastructure to maintain the platform for such an open and connected world requires lots of cash. It is then—and probably only then—that Zuckerberg is willing to use advertising to rake in the cash.

It just so happens that taking this approach is no only noble in a worldly manner, but ridiculously profitable. Just when Facebook has become integral in the lives of its billions of users, that's when the ads turn on.

And how well do those ads work at bringing in money for the company? Consider the mobile division, which only began offering ads in earnest by mid-2012.

Source: Facebook SEC filings

Over the course of less than two years, it has been able to grow revenue at 32% per quarter (that's about 200% per year, for you math majors).

The next step in the growth cycle
Based on how Facebook's stock reacted following earnings, it's clear that many investors think the days of heady growth are ebbing. On some level, those folks are right—no company could continue such a torrid pace of growth indefinitely.

But as Zuckerberg made clear in the company's conference call, one of the key initiatives moving forward will be copying how the company approached monetization on the main Facebook platform, and applying it to its next generation of apps—namely, Messenger, Instagram, and WhatsApp.

Source: WhatsApp, Instagram, Facebook

As Zuckerberg explained: "We believe these apps have a lot of room to grow and will start to be important businesses in the future, but monetization isn't our near-term priority here."

For investors, what this really means is: "We've got some cool apps right now, and coolness is what's going for them. We're going to let that coolness run and when the time is right, turn on the monetization machine."

How popular are these apps?  Consider the Instagram went from having 22 million monthly active users two years ago, to 200 million today.  Or think about the fact that Zuckerberg himself said that he thinks WhatsApp could one day be as ubiquitous as Facebook's platform.

It's clear that advertising will be the monetization route of choice for Instagram, but Zuckerberg has made it clear he doesn't think that will work for Messenger or WhatsApp.  While he has said that there are, "many clear ways that [Facebook] can monetize," these two, no specific details have been released.

As it stands, WhatsApp users pay a $1 yearly fee.  That won't change anytime soon, as the company works on winning over customers.  But in addition to the subscription model, Facebook could consider virtual gifts and freemium game platforms as other potential revenue streams.

While traders and short-term investors might roll their eyes at such an approach, us long-term Fools can smile at the market's reaction. We can also take solace in the fact that Zuckerberg is young, has a long-term vision for the company, and doesn't seem to be the least bit concerned about Wall Street's "now, now, now" mentality.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2930684, ~/Articles/ArticleHandler.aspx, 8/20/2014 11:20:51 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement