After last month’s mixed third quarter earnings report, many Facebook (FB) investors are trying to figure out what to do with the stock. Overall performance was strong year-over-year, but Chief Financial Officer David Wehner announced that expenses in 2015 will likely increase between 55% and 75%. Facebook stock dropped nearly 7% in after-hours trading following the conference call and has yet to recover.
Clearly, investors are concerned about whether the company can sustain its recent growth trajectory. But long-term investors should not overlook all the big projects CEO Mark Zuckerberg has underway that could drive significant revenue growth in the future.
The following are 6 major initiatives for investors to watch.
Facebook bought the instant messaging app in February for $19 billion, hoping to capitalize on the existing international user base of over 450 million subscribers. Between February and August, the number of active WhatsApp users increased to more than 600 million. FB fully expects that figure to increase to more than 1 billion at some point next year. Zuckerberg stated that messaging is a “big priority” and WhatsApp will be a main focus in 2015.
Currently, there is no fee to use WhatsApp for one full year. After that the cost is only 99 cents annually. FB previously announced it has no current plans to monetize WhatsApp with ads, but that, of course, may change in the future. The magnitude of the reach now possessed by FB via the app is a valuable asset, which is overflowing with untapped potential.
In April 2012, FB bought the photo-sharing startup Instagram for what seemed then the outlandish price of $1 billion. At the time, Instagram was barely 18 months old. Zuckerberg has since grown the app’s user base to more than 200 million monthly active users. FB recently began to monetize Instagram with video ads, but is deliberately proceeding slowly. Since Facebook did not disclose specific revenue figures for Instagram, it’s impossible to determine the success of the new video ad platform.
However, it’s clear that Instagram has significant potential. As long as FB can find that happy middle ground of surfacing an acceptable number of relevant advertisements, Instagram could become another massive revenue source pushing FB stock higher.
Zuckerberg’s inner philanthropist has a strong desire to bring the wonders of the internet to the far corners of the world. With a philosophy similar to Google’s (GOOG), Internet.org is the CEO’s pet project that seeks to provide free internet access around the world as a way to improve health, education, employment, and communication. Currently only available in areas of Zambia, Zuckerberg has hopes of expanding the project to other countries in the near future. His long-term goal is connecting the entire world.
While it’s not a profit-generating project, Internet.org has long-term potential to solidify the Facebook’s position as the world’s number one social media outlet. As Internet access is brought to people around the world, activity on social networks will quickly follow. What website do you think will be presented to those people? While Internet.org produces no current revenue stream, the long-term benefits far outweigh any risk to current profit margins.
In June, Facebook made a bold move by hiring PayPal’s CEO David Marcus to head up an ambitious new endeavor that involves developing the ability for Facebook users to send and receive mobile payments. With the company’s focus on improving communication between users and the monumental effort to update its messaging platform, Facebook could prove to be the Goliath of the mobile payments space.
PayPal, currently the dominant mobile payment system, has approximately 157 million account holders and recorded more than $200 billion in net total payment volume over the past 12 months. If Marcus can help Facebook implement a similar solution, the resulting cash flow could be staggering. More than 1.35 billion people use the site each month, and 1.12 billion do so via mobile devices. A mere fraction of those people conducting mobile payment transactions would make PayPal’s $200 billion look like pocket change, and Facebook stock would see an impressive boost.
Zuckerberg has stated that he believes virtual reality interaction will be the next transformation of the Internet and he aims to be on the front lines. In July, FB acquired the virtual reality startup Oculus VR for $2 billion. Investors balked at the expense, but they weren’t thinking as long-term as Zuckerberg. Sure, the current market for virtual reality-based products and services is nearly non-existent, but with the right visionary at the helm — and deep enough pockets to fund some intense R&D — the technological revolution might be closer than investors realize.
Recognizing Zuckerberg’s potential to fuel a whole new industry, a few other companies quickly jumped on the bandwagon and began their own virtual reality R&D. Most notably, Sony (SNE) and Samsung (SSNLF) revealed prototype devices, which will further Zuckerberg’s goal of making VR a reality much sooner.
Even if Zuckerberg’s vision of a virtual-reality-based future never comes to pass, the financial repercussions to Facebook stock will be minimal. Of the $2 billion paid to acquire Oculus, only $400 million was cash, and the remainder was roughly 23 million shares of Facebook stock.
This is a highly ambitious move by FB and users are sure to have some privacy concerns. However, for Facebook stock, the change is a positive one. With fewer irrelevant ads, available screen real estate is quickly becoming more valuable. Last quarter, the average price per ad jumped an impressive 274%. Once the kinks are worked out of the location-based service, expect those prices to skyrocket once again.
Facebook’s advertising revenue increased by 64% year-over-year last quarter to nearly $3 billion. About two-thirds of that came from mobile, indicating the company is successfully capitalizing on the shift to mobile over desktop computing. Facebook stock will get a boost as advertisers jump on board with location-based projects.
The most important asset FB has is its massive user base and Mark Zuckerberg has an array of far-reaching plans to continue to grow that base and generate more revenue from advertising. Facebook stock is a keeper if you’re looking for a well-managed company with plenty of long-term growth potential.
As of this writing, Greg Gambone did not hold a position in any of the aforementioned securities.