If you like the idea of long-term growth, there’s one stock you need to have in your portfolio: Facebook (NASDAQ: FB). The social network has become one of the best buy and hold plays around because of its potential for revenue growth.
I must admit that I was real skeptical of Facebook when it first hit the market. I simply could not see how Mr. Zuckerberg’s company could make any money. Well, guess what? Old Mark proved me wrong. He created a company that is basically a revenue growth machine.
When Facebook started trading in December 2011, it reported a TTM revenue of $3.71 billion. When it last reported financial numbers for the third quarter of 2015, Facebook reported a TTM revenue of $15.94 billion. In other words, its revenue has grown five times in a little under four years.
Yes, Mr. Graham, Facebook Makes a Lot of Money
Okay, that’s impressive, but as Benjamin Graham would ask, “Does it make money?” The answer to that question, as the financial numbers indicate, is yes.
On September 30, 2015, Facebook reported the following numbers that cash lovers should take notice of:
- A net income of $2.82 billion
- A free cash flow of $1.412 billion
- A profit margin of 19.91%
- Cash and short-term investments of $15.83 billion
- $7.355 billion in cash from operations
The answer to Mr. Graham’s all-important question is that Facebook makes a lot of money. Unlike some other technology companies, such as Twitter (NYSE: TTM), which reported a net income of -$556.15 million, Facebook is actually making money.
Why Facebook Will Continue to Grow
It’s not just the cash and the growing revenue that makes Facebook such a great buy and hold play. It is the potential for the future and Mark Zuckerberg’s genius at strategic acquisition.
In February 2014 Zuckerberg spent between $19 and $21 billion to purchase a little messaging solution called WhatsApp. A lot of people scoffed because WhatsApp reported revenue of just $15.931 million and losses of $232.5 million in the first quarter of 2014, according to TechCrunch.
Yet Facebook might have gotten a bargain because WhatsApp had around 900 million users around the world in September 2015, according to Zuckerberg. As I noted elsewhere, Facebook’s own messaging solution, Facebook Messenger, has around 700 million users. That gives Facebook a messaging platform of around 1.6 billion users.
When that is added to the 1.55 billion users that Statista estimated for Facebook in third quarter 2015, it gives Zuckerberg a platform with the largest audience and potential market in human history. I will not try to calculate the number of total users because there is obviously some overlap, but it is staggering. The potential from this is staggering and definitely reminiscent of Google.
If Zuckerberg could figure out to how to generate just 50¢ in revenue from each Facebook user, he’d generate $775 million a month, or $9.3 billion a year, in additional revenue. If Zuckerberg could figure out how to generate 25¢ a month in revenue from each Facebook Messenger or WhatsApp user, he’d generate $400 million a month, or $4.8 billion a year, in additional revenue.
Obviously, none of this is set in stone, but given Facebook’s expertise at monetizing solutions, it is well worth thinking about. Many of us will be reminded of Google, which has reaped vast amounts of cash from such oddities as online advertising and cat videos.
Facebook’s Future Is Messaging
Just a few of the ways that Facebook could monetize messaging and its pages include:
- Paid searches.
- Paid lists of WhatsApp users. There’s already a Broadcast List WhatsApp feature directed at business customers.
- Zuckerberg has already discussed the possibility of a video channel with a profit sharing arrangement. Facebook is trying to develop an AI video solution to connect to its feeds, Fast Company reported.
- Some sort of app store that sells applications, including software, much as Apple’s App Store and Google Play do.
- Audios, especially music.
- Facebook or WhatsApp shopping.
- Services offered through WhatsApp. This is already going on in India.
- Payment, perhaps Facebook Pay or WhatsApp Pay, similar to Venmo. Barclays estimated that the Chinese telecom Tencent made $1.1 billion a year from its payment solution in 2014.
- Feeds such as the Facebook News Feed, which could become the TV networks or newspapers of the future.
Could Facebook Out Google, Google?
If all this sounds a lot like Google, which recently morphed into Alphabet (NASDAQ: GOOG), you’re right. Google’s basic business model is to create a platform, carefully analyze the data it generates, then look for ways to monetize the data. Facebook seems to be following that model pretty religiously.
That is combined with heavy investments in next generation research, particularly in artificial intelligence. The purpose here is to make Facebook more responsive to its users and develop more potential streams of revenue from it, much like that going on at Alphabet, which is more of a think tank than a traditional corporation.
To this mixture, we can add a healthy dose of strategic acquisitions, including the $2 billion Zuckerberg spent on virtual reality developer Oculus VR and Instagram. Like Warren Buffet, Larry Page and Sergey Brin, Zuckerberg understands the value of a good acquisition. He’s willing to spend good money for really good companies, as the WhatsApp purchase shows us.
All of this, of course, points to healthy long-term growth and a great buy and hold play. More importantly, it’s a buy and hold play that’s a lot cheaper than Alphabet right now. Facebook was trading at $105.09 a share on November 17, 2015. Shares of Alphabet were trading at $745.98 a share on the same day.
The bottom line is if you want your portfolio to grow, Facebook would be an excellent addition. If you want to buy one technology stock right now, Facebook would be a great choice.