Facebook (NASDAQ: FB) is taking big steps towards building a social-commerce platform on Instagram in an effort to boost Facebook stock. Recently, it has added the ability to make purchases within its app, instead of directing users to merchants ‘sites.
That will make the entire process seamless and lower the friction encountered by customers. However, there are a number of bottlenecks which should limit the bullish potential of Facebook stock in the wake of this move.
WSJ titled an article, “Instagram Encroaches on Amazon With New Shopping Feature.” It mentioned that Facebook’s social-commerce initiative could end up hurting Amazon (NASDAQ: AMZN). The current program is limited to 20 brands like Nike (NYSE:NKE), Dior, Prada, and others. Even if Instagram broadens the program by adding more brands, this shopping initiative will remain a niche offering.
At the same time, too much commercial activity on Instagram can put off customers who are using it for social interactions. Lower user engagement on Instagram will hurt the bread-and-butter advertising revenue of Facebook and have major, negative repercussions for Facebook stock.
Will It Move the Needle for Facebook Stock?
FB has trailing twelve month (ttm) revenue of $55.8 billion. Its ttm net income is $22.1 billion. At its current size, Facebook needs major moneymakers to meaningfully increase Facebook stock.
Meanwhile, the company is looking to diversify its revenue away from advertising. In his latest letter, FB CEO Mark Zuckerberg mentioned that the company would be focusing on social commerce and payments to drive growth. Management believes that these new initiatives will create bullish momentum in Facebook stock.
But this initiative probably won’t result in FB getting even a small fraction of e-commerce retail sales. In the trailing twelve months, Amazon reported over $200 billion of net sales from its e-commerce platform in the U.S. and international regions.
A recent study by Feedvisor found that two-thirds of customers start their search for new products on Amazon. Moreover, 95% of the respondents were happy with AMZN’s search results and 74% go to Amazon to buy a specific product that they have already selected. At the same time, a majority of users reported that Amazon’s ads were useful and 75% of them clicked on its ads to purchase an item.
On the other hand, Instagram and Facebook are used for social interactions. Adding a commerce aspect to the tool can cause users’ experience to deteriorate. During the company’s last quarterly earnings conference call, CFO David Wehner mentioned that Instagram’s ad load had reached saturation levels. Adding more ads or commerce could end up undermining the primary purpose of Instagram.
In the next few quarters, we should get a better picture of the traction of the social-commerce tool. However, even in the best-case scenario, it would be difficult for this tool to meaningfully boost Facebook’s top line or bottom line.
The Track Records of Facebook and Amazon
This is not the first time FB has tried to add a purchasing option to its platform. The company has been flirting with this option for a number of years. Five years ago, the company added a similar buy button to Facebook. A lot of new features were added to entice customers to use Facebook for their e-commerce purchases. However, Facebook’s e-commerce market share is marginal.
Fig: The non-advertising revenue of Facebook is a rounding error, despite the efforts made by the company to diversify its revenue base. Source: Facebook Filings
While Facebook was tinkering with social commerce, Amazon has transformed its advertising segment into one of its most profitable businesses. Facebook’s privacy issues have led to growing interest in Amazon’s advertising platform. Customers already visit Amazon intending to buy products. That attribute increases the attractiveness of AMZN to advertisers.
Amazon’s digital-advertising growth is much higher than that of either Facebook or Google. Piper Jaffray’s Michael Olson has estimated that Amazon’s advertising income will surpass the profits of its cloud business, AWS, by 2021.
While Amazon has been very successful in advertising, Facebook’s attempts to improve its e-commerce and payments business have failed. This shows that while a concept might look great on paper, it is much harder to convert the idea into a profitable business.
Investors should take the current e-commerce initiatives by Facebook on its Instagram platform with a grain of salt. They should wait for a few quarters to see how much actual traction the initiative gains before incorporating the long-term potential of this business into their analysis of Facebook stock.
The Bottom Line on FB Stock
FB has launched a purchasing option within its Instagram platform. The company is collaborating with 20 brands to build a seamless buying experience on Instagram. However, the long-term potential of this feature could be limited by the fact that those who visit Facebook aren’t very interested in buying products. As a result, adding an e-commerce tool can hurt users’ engagement with the platform.
The impact of this initiative on Amazon’s massive e-commerce business will be negligible. Amazon’s efforts to grow its advertising business have been much more fruitful than Facebook’s efforts in e-commerce Consequently, the long-term growth potential of Amazon stock remains strong.
As of this writing, Rohit Chhatwal held no positions in the aforementioned securities.