Why I Am Bullish On Facebook The Company

As a rule, and with only rare exceptions, I don't buy public stocks. I prefer to limit my equity investments to early stage start-ups. Thus, I won't be buying Facebook shares when they go public soon. However, I am very bullish on the company.

As big as Facebook is today, I believe that it will become a much, much bigger and more valuable company over time, and I suspect that folks who buy its stock will do well. Here are my reasons why:

Massive consumer platform. Facebook is approaching a billion global users of its Web services. It represents 25%-30% of all Web usage in the U.S., and is still growing fast in all global markets in terms of users and minutes per user. While TV networks are larger in terms of total audience on a market by market basis, we've never ssen a consumer media or communications platform -- mobile telephony included -- grow this big this fast, with so much headroom to go.

Big network effects. The more people who use Facebook -- and the more time they spend on it -- the more valuable it becomes for everyone else. The more value-adding services Facebook offers, the more people who will use it and the more time they will spend on it. Facebook is in the vortex of a massive, explosive viruous circle. The bigger and faster it gets, the bigger and faster and more valuable it will grow.

Partnership ecosystem-focused. Facebook appears to have recognized early on that that the key to growing a big platform fast is to support and add unique value to partners. It started with social gaming and Zynga, and is now trying to establish similar partnerships in music (Spotify) and news (WashPost) and e-commerce. It is trying to create a value-adding ecosystem where its platform is the essential center. Microsoft initiated a very similar and quite successful strategy 30 years ago with the personal computer ecosystem and its Windows and then Office franchises, each of which still generate many billions of dollars of profit every quarter.

Enormous monetization opportunities. Clearly, given the size of its audience, the intensity of their engagement and the robustness of its proprietary data, Facebook has the potential to build the largest advertising business we have ever seen. However, I also like all of the non-advertising opportunities it has. There's already a nice business with Facebook credits. It certainly has a lot of potential as a commerce platform. And, given its mandate to only observe "real" identities, it has the capacity to build a global payments business that could dwarf all of its other monetization opportunities.

Smart, engaged team. In fast-growing companies today, people are as important -- or even more essential -- as technology. Mark Zuckerberg appears to be growing into the role of CEO. Sheryl Sandberg certainly seems to be coming into her own as a strong operating executive. And Carolyn Everson, who runs advertising sales, is one of the industry's rising stars.

Not afraid to think and act like a media company. The business of media is the provisioning of consumer contact. Paradoxically, many technology-driven Web companies have been uncomfortable with the "media company" label, in spite of relying on the provisioning of consumer contact for the vast majority of their revenue. Think Netscape, Yahoo and, most recently, Google. This is one of the reasons these firms hit ceilings in their development as advertising companies. While Facebook at this point also talks of itself as a tech company, it seems more comfortable than its predecessors in thinking and acting like a media company.

I don't have a well-formed opinion on what's the right price for Facebook stock, nor do I know what's a reasonable market capitalization for the company. And I certainly don't know how institutional investors will treat it once it's public. I am sure it will be a roller-coaster ride. That said, I'm very bullish on Facebook's future as an operating company. What about you?



5 comments about "Why I Am Bullish On Facebook The Company".
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  1. Douglas Ferguson from College of Charleston, May 10, 2012 at 9:07 p.m.

    Warren Buffett is sitting out the Facebook IPO. Good enough for me.

  2. Leonard Zachary from T___n__, May 11, 2012 at 9:09 a.m.

    As an active investor, I have an issue reconciling two facts: 1) Facebook does not have an articulated mobile strategy; 2) It is unprecedented to have an IPO stock get listed on the Nasdaq 100 index within 3 months from IPO date. This type of gaming the financial system creates artificial demand for an unproven publicly listed security, which normally takes 12 to 24 month vetting process to get on the index. Think of investors that do not want Facebook but will automatically own it because its on the largest index based on an inflated market cap. Think of the accounting restatements made by Groupon, another newly minted public security. Otherwise Facebook makes for an interesting IPO but it is very richly priced with many insiders bailing out.

  3. Brian Hayashi from ConnectMe 360, May 11, 2012 at 3:13 p.m.

    As someone who has been spending a lot of time with mobile for the past ten years, the idea that Facebook needs a mobile strategy now misses the value of Facebook's existing assets as they play out on people's mobiles, today. Why have so many SMS programs failed to live up to carriers' expectations? What mobile programs are truly international in scale and scope? What percentage of main street merchants will take the time to listen to some new technology play if they're already using Facebook? The reality is that Facebook is well-positioned to take a commanding lead in the emerging mobile marketplace for all the reasons that Dave Morgan articulates.

  4. Dave Morgan from Simulmedia, May 11, 2012 at 8:34 p.m.

    Thanks Brian. Great points.

  5. Ned Newhouse from Conde Nast , May 17, 2012 at 6:56 a.m.

    Mobile or not, Facebook needs an ad strategy that works for advertisers. I've spoken to many brands, it doesn't. This was never locked down. Just because you have a massive audience does not make you successful. Successful ad environments on the web are about content context realitivity. Facebook has little relativity to goods and services esp when you're there to view the activities of family and friends. In and out, good got what I needed- I'm onto something else.

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