Look Out China, Here Comes Facebook Inc

Despite being blocked to Chinese citizens, the social media king isn't letting that stop them from setting up shop.

Jul 8, 2014 at 2:05PM

The continual growth of Facebook (NASDAQ:FB), from both a user's perspective as well as virtually every financial measure, is nothing short of incredible. With nearly 1.3 billion monthly average users, or MAUs, and over 800 million that access it on a daily basis, Facebook has been instrumental in changing the way the world communicates. That's pretty heady stuff for a 10-year-old up-start.

Despite opening down on Tuesday, it's not likely too many Facebook shareholders are complaining as they enjoy its 154% jump in share price in the past year. Part of what makes Facebook's stellar stock run-up impressive is that it's not based on rumors or momentum -- like social media wannabe Twitter (NYSE:TWTR) -- but rather on-going, sound financial performance, along with aggressive growth initiatives. Now, imagine the opportunity a market like China offers, with its 1.3 billion non-Facebook using citizens. Chief Executive Officer Mark Zuckerberg can imagine it, and is taking steps to make it a reality.

What's the deal with China?
It was five years ago this month internal strife in the world's most populous country put an end to Facebook in China. Riots in China's Xinjiang Province were to blame. The Chinese government determined that activists seeking independence were using Facebook to bolster support for its cause. So, rather than just monitor its usage, like the U.S. government does, China simply pulled the Facebook plug. Twitter suffered the same fate, a situation that if remedied, would almost certainly allay slowing user growth fears plaguing the tweet-master.

There are relatively easy workarounds for visitors and Chinese citizens to access the likes of Facebook and Twitter using virtual private networks, or VPNs, but that's not what Zuckerberg had in mind when he said Facebook's goal was to connect the next five billion users via its Internet.org initiative. As big a user base as Facebook has, it's only a fraction of the world's population. Though opening the doors to China wouldn't solve the Internet.org objective, it would sure be a big step in the right direction.

Why Facebook needs China
There's a reason over 80% of Facebook's 1.28 billion MAUs are outside the U.S., there simply aren't that many folks here. Clearly, user growth and the additional advertising and supplemental revenues that come as a result, is a key objective for Facebook, and even more so for sputtering Twitter. Riding Facebook's coattails into China would dovetail nicely with Twitter's strong Asia-Pacific presence. The region is currently Twitter's number one market, making up about 30% of its user base.

Connecting the rest of the world via its new solar-powered Internet drones is certainly one means of continuing Facebook's user growth. But with a population the size of Facebook's impressive 1.28 billion users, opening the door to China brings with it the possibility of nearly doubling its MAUs, virtually overnight.

China, here we come
If the infamous "unnamed sources" are to be believed, Facebook has already signed a three-year lease on 8,600 square feet of office space in China's Fortune Financial Center. Why would it go through the trouble of renting all that space if the government remains anti-Facebook? A couple of reasons. One, despite its being blocked to the vast majority of Chinese citizens, that hasn't prevented Facebook from generating ad revenue from local companies interested in selling internationally. Last quarter alone, Facebook generated over $350 million in revenue from Asia. Facebook also has a contingent of app developers in China, and a significant presence will bolster its already strong dev community.

Final Foolish thoughts
As seems to be the case since its initial public offering, Twitter is almost certainly rooting for Facebook, this time in China. Lifting the moratorium on social media sites for 1.3 billion potential users would immediately address Twitter analysts and investors concerns surrounding slowing user growth. Many expect Twitter's user growth problems to continue far into the future, too. China could fix that, in one fell swoop.

For Facebook, establishing a Far East presence now not only supports its existing ad sales and app development efforts, it lays the groundwork for what would be the impetus for an explosive growth phase. The fact that Facebook has grown as it has without the world's largest population is stunning, just imagine what'll happen when China finally lowers its firewall?

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook. 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.

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