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).
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 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.