Why Facebook Inc (FB) Stock Won’t Be Dethroned Anytime Soon

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Stocks like Facebook Inc (NASDAQ:FB) are among the hottest in Wall Street right now, but when you invest FB stock or anything else for that matter, one of the things you want to look for is a sustainable competitive advantage, which Warren Buffett refers to as a “moat.” This moat can be brand equity, as with Apple Inc. (NASDAQ:AAPL) or The Coca-Cola Co  (NYSE:KO).  

Why Facebook Inc (FB) Stock Won't Be Dethroned Anytime Soon

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In the case of Wal-Mart Stores Inc (NYSE:WMT) or Amazon.com, Inc. (NASDAQ:AMZN), it can be the cost advantage that comes with being big. For pharmaceutical companies, the moat could be a blockbuster drug protected by intellectual property laws.

FB Stock: What’s Its Moat?

With all of that in mind, does Facebook stock have an edge over the competition?

I think so; despite years of trying, so far nobody has succeeded in ousting it from its position as the world’s No.1 social network. In fact, FB stock is up 308% since going public in 2012.

But why is toppling Facebook so difficult?

Social networks operate according to the network effect; the value of a social network like FB increases as more people join it. You probably have no choice but to maintain a Facebook account, since it is likely that most of your friends use it. And they might have to keep using Facebook to keep in touch with most of their friends. And so on.

However, FB should not take this as an excuse to rest on its laurels. It’s always possible that the company might stumble, creating an opportunity for a challenger to seize the crown.

Snap Inc (NYSE:SNAP) may be reeling from Facebook’s apparent success in copying its best features, but it could mount a successful comeback. Or maybe China’s Tencent Holdings Ltd (OTCMKTS:TCEHY) might finally discover the right formula for international expansion.

But barring such events, I think Facebook stock can maintain its dominant position for quite a while. Politicians currently in office are tough to unseat, and I think incumbency also benefits the world’s No.1 social network.

Critical Mass: Why Myspace Failed and FB Succeeded

OK, maybe with social networks, size matters, and the rich tend to get richer over time while the poor remain poor.

But if this is the case, then why didn’t Myspace, which peaked at 100 million users (about 1.4% of the world population) in 2008, maintain its lead?

Myspace lacked something that Facebook has: critical mass. In 2008, only one in every four people worldwide had Internet access; today, nearly half of the world’s population can access the Internet.

Myspace lost momentum precisely when it needed it most. Once FB overtook it, there could be no turning back. Facebook became No.1 and started benefiting from the network effect. Myspace couldn’t reclaim the top spot.

Now Facebook boasts nearly 2 billion people monthly active users. This means nearly one in every four people worldwide, about the same fraction which enjoyed internet access in 2008, check Facebook every month.

Facebook’s Dominance in Chat

Now some think that the transition to mobile may reduce the network effect and its impact. Smartphone address books make it easier to move contacts between apps.

But Facebook also dominates the world of mobile chat apps, owning Facebook Messenger and WhatsApp.

Here you can see the world’s 10 most popular (by monthly active users) messaging apps as of January 2017. WhatsApp and Facebook Messenger top the list, each with over a billion monthly active users.  

Then come Tencent’s apps: QQ, with 877 million users, and WeChat, with 846 million. But their users tend to be concentrated in China, where Facebook is blocked by the Great Firewall. One estimate put WeChat’s users outside of China at 70 million as of December 2015.

Facebook, on the other hand, has a strong presence in markets outside of the United States. The United States boasts the most Facebook users, with 219 million, followed by India, Brazil, Indonesia, Mexico, the Philippines and Vietnam.

India is WhatsApp’s biggest market, with 200 million active users, up from 20 million in August 2013.

After WeChat and QQ come Skype and Snap, each with 300 million users, followed by Viber (249 million) and Line (217 million). The apps that follow, however, boast fewer total users worldwide than FB has in the U.S.  

I think dethroning Facebook stock will be very difficult. Other apps just don’t have the same scale and global reach. And if they do start making progress, the company will see this and begin copying their best features, as they did with Snap. Facebook and WhatsApp also appear to be borrowing features from WeChat. All of this points to enduring strength of FB stock.

As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/facebook-inc-fb-stock-wont-be-dethroned/.

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