I had long believed Facebook (NASDAQ:FB) stock is the most vulnerable of what I call the five Cloud Czars. Like Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN), Facebook has invested tens of billions of dollars over the years in a network of cloud data centers that are revolutionizing telecommunications, by making it an adjunct of computing.
But unlike its larger rivals, Facebook is supporting this infrastructure entirely on its own, with services it doesn’t charge for. Facebook, Instagram and WhatsApp are all variations on a theme — free, ad-supported public communication.
It’s still a very good business. Facebook said it earned $2.4 billion, 85 cents per share, during the first three months of 2019 on revenue of $14.9 billion. Revenue was up 26% from a year earlier. Earnings were cut in half because it set aside $3 billion to pay fines over its constant privacy breaches.
What Next for FB Stock?
Facebook claims it now has 2.38 billion users. That’s one-third of the planet. Two thirds of them are beyond the reach of U.S. or European regulators. The “regulated” user figure has barely budged, up just 5% in the last two years. The number of monthly users outside that area are up from 845 million in the first quarter of 2017 to 1.09 billion now.
Facebook is now how most of this world communicates. Almost by itself, Facebook has broken the old “PTT” monopolies that once slowed communication in the developing world with taxes and regulation. The price for a gigabit of mobile data in India is 26 cents. It’s $12.38 here.
Despite this privileged position, Facebook needs a second act. CEO Mark Zuckerberg has now revealed what it is. It’s as audacious as his decision early this decade to build clouds before Facebook had the cash flow to sustain them.
The Global Phone Network
Facebook plans to build an encrypted “living room” service running alongside the public “town hall.” Facebook will become the globe’s phone company, not just a social company.
Once it can protect private streams of data, Facebook can also become a conduit for paid data. While Amazon, Google and Microsoft battle to own the cloud, Facebook can dominate communication in its fastest-growing markets, with prices starting at free. It also becomes a natural re-seller for all types of content, including transaction content.
While western regulators are focused on what Facebook does with user data or what thoughts it lets people publish, Facebook itself is quietly bringing Asia, Africa and Latin America into the global business mainstream, delivering bits through a satellite network whose last mile consists of wireless systems without the “technology debt” of the west’s wired networks.
While AT&T (NYSE:T), Comcast (NASDAQ:CMCSA) and Google have been struggling to upgrade connectivity with expensive fiber rebuilds, FB stock knows that going from today’s 4G service to tomorrow’s 5G requires just an upgrade to base stations and cheap wireless backhaul. Once the developing world is on these cheaper networks, once those communications are secure and private, Facebook becomes the gatekeeper to global growth.
The Bottom Line
Facebook stock will remain volatile.
It recently hit a high thanks to those earnings, and its market cap currently sits over $552 billion. That’s twice the value of AT&T, or Walt Disney (NYSE:DIS). It’s almost three times the value of Comcast.
But none of those companies has a plan to monetize the value of a truly global network. Even the other Cloud Czars are waiting for opportunity to come to them.
My plan is to let FB stock fall, as western governments go after the company or even Zuckerberg himself. Let everyone think its growth is capped if it’s not selling movies or apps.
The fact is that Facebook is playing a different game, and it’s winning.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, MSFT and AAPL.
