Facebook Inc (FB) Turns to Software as Oculus Rift Goes up in Smoke

Facebook stock has learned a valuable lesson that is keeping it from slipping big-time

Facebook Inc (NASDAQ:FB) does not always succeed. Sometimes it fails bigly. With the Oculus Rift, Facebook stock did a face-plant. After buying Oculus for $2 billion in March 2014, Facebook finally delivered a product to a customer in March 2016.

Facebook Inc (FB) Turns to Software as Oculus Rift Goes up in Smoke

Since then, Facebook has not offered any numbers on how many units have been sold. Analysts believe a headset from Sony Corp (ADR) (NYSE:SNE), tied to the Playstation, has sold “hundreds of thousands” of units and a headset from Taiwan’s HTC perhaps 100,000. 

I would argue that Oculus has been an embarrassment for Facebook stock holders and the company. FB tried to tie the headset to the Samsung Galaxy Note 7 — the one that caught on fire. Meanwhile, Oculus founder Palmer Luckey was found to be funding memes on behalf of Donald Trump.

But buy Facebook stock anyway, sure.

Hardware Is Software for Facebook Stock

The failure of Oculus has re-taught Facebook an important lesson and is keeping it from making a really big mistake.

The lesson is that hardware is software. Rather than focusing its money on client devices, Facebook has put its hardware dollars into cloud data centers, building a network of six (so far), which are in their own way works of art. And the key to all of them is that they’re primarily software.

Facebook first learned this lesson with the Facebook phone (remember that?), but it has mainly been concerned with turning hardware into software through its Open Compute Project. The project recently took Facebook’s design for a 100 Gbps switch and open sourced it. 

Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) has joined the Open Compute Project, buying a startup called Nascent Objects and putting its people to work on Open Compute Project work under a former head of the Defense Advanced Research Projects Agency, from which the internet’s own funding emerged in the 1970s.

Virtualizing networking switches, storage and computing itself renders hardware irrelevant to the process of growth. Everything becomes code. That’s Facebook’s vision, and it’s an important one.

The Great Game Continues

Meanwhile, Facebook’s rivals are going full-tilt toward client devices designed to tie users to their own clouds, networks and services.

Amazon.com, Inc. (NASDAQ:AMZN) launched a new generation of voice interfaces with its Echo speakers, and Alphabet has followed with a full line of hardware, seeking to turn voice technology into proprietary advantage. Apple Inc. (NASDAQ:AAPL) is in the game with Siri; Microsoft Corporation (NASDAQ:MSFT) with Cortana.

But the idea that one company’s voice interface will determine a user’s interaction with the entire internet, or all of their remaining hardware, is simply naïve. Open source, open standards and open development have proven their worth, because the more people working on a project the faster it advances.

Facebook has fallen on its face in client hardware enough to have learned this lesson. It has a big advantage over rivals as a result.

Just Buy Facebook Stock

Since coming public in 2012, Facebook stock is up over 200%. Unlike Amazon, whose gains in that period do exceed that, its margins now exceed 25% consistently, it has no debt, and its operating cash flow this year should top $10 billion.

You can’t go wrong with any of the FANG stocks — Facebook, Amazon, Netflix, Inc. (NASDAQ:NFLX), or the artist formerly known as Google. I have one-fourth of my own retirement account in these shares. They’re all winners.

But Facebook is the smartest of the bunch. It understands how software and services scale in ways hardware just can’t. Thus the company is focusing on software-driven services like food ordering and extending its network into workplaces, as described by our Hilary Kramer.

So long as it does this, margins should remain exceedingly high and Facebook stock holders should love that.

Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time.  Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, GOOGL, MSFT and AMZN.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/10/facebook-inc-fb-stock-data-center-ipmedia/.

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