My post today is about my greatest investing success so far, a company that we had no idea existed in 2006 and that became a very important part of our daily lives… Facebook (Ticker FB).
I bought 20 stocks of FB in March 15th, 2013 at an average cost (incl. brokerage fees) of $26.70. This is one of my “small bets”, $500-600 investments that I make once a quarter on stocks that are more speculative than my usual portfolio picks… It has proven wildly successful as FB stocks are now hovering north of $75! Facebook has been my first and only 3-bagger stock (+200%) and I believe it still has the potential to continue to provide turbocharged returns in the future. Let me tell you why (…)
Why did I invest in Facebook in the first place?
Charlie Munger said it over and over: Know what you are investing in! And my wife would tell you…”The guy spends his life on Facebook”.
Living in the US and friends and family scattered around the world, I use Facebook to get my mix of global daily news and stay connected with my folks across the oceans. I can even get addicted at times and had to set some rail guards to keep my Facebook consumption under reasonable control.
When I bought my FB shares, Facebook and Zuckerberg were falling out of grace after a “disastrous IPO” and persisting rumors about the inability of Facebook to monetize the shift to mobile and to retain the younger generations. The FB pessimism reached its apex when Barron’s published its famous cover “Facebook is worth $15”. As a regular Facebook user on a mobile platform, I just knew that the user experience was great, that ads were served with an increasing frequency without getting too invasive. I just felt that the market was “freaking out” on Facebook and getting into one of these irrational frenzies that often create the best investing opportunities.
Where do we stand today?
I believe that Facebook continues to be a very compelling long term investing opportunity and I will give you 7 reasons to justify this statement:
1. Facebook continues to be the most engaging social platform
Twitter is not for everyone. It takes time to set up a twitter account, follow the right people, develop the right followers and get the full value and that smooth daily experience that Facebook can give you in 2 days… How much fun can you have with LinkedIn and its infinite litany of posts about corporate leadership. Google +….what is that again? Snapchat, bizarre if you have more than 18 years old… Facebook is sleek, simple, intuitive and at time, addictive.
Facebook has now 1.4 Billion Monthly Active Users, 64% of which are active every day….That is staggering ! The number of Daily Active Users continues to grow as of Q4 2014 with 26.5% YoY growth in Asia Pacific, 11% in Europe, and even 7% in the highly penetrated North American markets.
And you know what? Zuckerberg is not satisfied with 1.4 Billion users. He is actively engaged in the internet.org initiative that aims at offering internet access to everyone. And he keeps repeating in all his external PR communications the Facebook Mission: “Connect the World”.
In a very interesting discussion in Davos 2015 with Sheryl Sandberg, and Satya Nadella, Google’s chairman Eric Schmidt shared some interesting prophecies about the coming death of Internet as we know it and its replacement with an internet of things, ubiquitous, very dynamic, very personalized and very natively social…It is very well possible that Facebook will be that Social layer, unless it gets disrupted which is possible but more and more difficult.
2. Facebook’s profitability and cash generation are now impressive
Zuckerberg is famed for having dropped out of Harvard and made his first Billion at 23 year old…But Facebook’s latest results are not less impressive.
An operating margin that went from 10% in 2012 to 40% last year. A profit margin that grew 23 fold in the meantime from 1% to 23.6%. For a young company that IPOed in May 2012, this is a heck of track record.
Facebook’s investments of the last 7 years have started to pay very nicely with operations gushing more and more cash: from $698M in 2010 to $1.6Bn in 2012 and $5.5Bn in 2014. This is monetization at its best.
3. Facebook has (one of) the best leaderships in corporate america
OK, OK ! Let me go ahead and share my own crazy personal prediction on this topic. I think that over the next 10 years, Mark Zuckerberg will make us “forget” who Steve Jobs was.
Dont get me wrong! Zuck is less charismatic and gutsy than the mythic father of the iPhone, but he impresses me every day with his intelligence, his calm, his maturity, his strategic aggressiveness, his ambition and his determination.
The guy went through hell when Facebook stocks went from $38 in May 2012 to $18 in August. But he continued to steer Facebook very calmly, building what he had in mind, communicating what he needed to communicate, whether the market liked it or not. He is only 30 year old, seems very committed to Facebook and should only get better over time.
He has 2 qualities that – for me- set him apart in this universe of young Silicon Valley Billionaires.
The first one is that he seems to have less hubris and less ego that the Steve Jobs, the Ellon Musks and Jeff Bezos of the world. He got famous while wearing hoodies and flip flops. He did not marry a hollywood star. He did not buy the New York Times. He is not trying to colonize Mars. In fact, he is confident enough to let a Sheryl Sandberg grow and shine as a Facebook COO. That is admirable. Who is the COO of Amazon? I am sad to admit it but I have no idea…
The second one is his genuine global perspective. Zuck impressed during his last visit to China when he expressed himself in a fairly good Mandarin. He went to Bogota 2 weeks ago to meet students and have another of his casual Q&A sessions. He constantly thinks about the world…The world is a basic ingredient of his concept. It is not just a growth opportunity for a US venture…
4. Facebook’s valuation is far from crazy…
Two numbers to consider here.
Facebook’s forward PE is 29.5 (based on 2016 earnings). This is not a big number…This is a very realistic valuation for a company that grew its revenue by 55% in 2013 and 58% in 2014.
The second number, related to the first one is the PEG that stands now at 1.24. You rarely get companies with the maturity / profitability of Facebook and that keep growing above 50% per year below a PEG of 2.00. 1.24 is cheap. It factors a good deal of pessimism on a slowing growth that we did not see yet.
5. Facebook’s ad platform is unbelievably good
I wanted to try it for myself. I created a Long Term Investing page on Facebook. I was first impressed by the “Insights” that Facebook gives you about your posts, the likes, the engagement and the demographics of your target.
I then went into 2 experimentations: the first one was to boost one of my posts. I was able to define a very specific target, using an impressive range of demographic and behavioral criteria. The whole campaign building process was very intuitive. My post was served to 202 facebook users and received 5 clicks (click through rate of 2.33%). This campaign cost me $1.74 !!!
My second campaign was to promote my Facebook page and hire new fans…My ad was delivered to english speakers in the US, highly likely to be investors, age 21 to 51, with an interest in Stock Exchange, Warren Buffett, Value Investing and using Facebook via a desktop or an iPhone connected to a wifi network…It was served to 901 Facebook users, generated 37 clicks (4%+ click through rate) and 30 page likes. The total cost was $14.86.
I was extremely impressed by the value, the simplicity and the power of this advertising platform. It has more juice than what I used to get as an advertiser for one of the world’s largest car manufacturer 10 years ago and it is available for anyone with a credit card and a budget that starts at $1.00.
You can use it for million dollar global branding campaigns or for micro-targeted local ads. I think it has the potential to deeply transform the marketing and communication of millions of companies around the world…The revenues that it generates today are probably the tip of the iceberg…
6. Facebook has a huge runway internationally
Since 2009, Facebook made huge progress internationally, becoming the dominant social network in 130 countries out of the 137 analyzed byvincos.it.
The ARPU (Average Revenue per User) that Facebook generates in quarterly stands at $9.00 in North America (Q4) vs. $2.81 on average globally.
If Europe (currently $3.45 ARPU), Asia ($1.27) and ROW ($0.94) were to catch up with the North American Level, which will eventually happen (assuming Europe reaching 100% of the North American current ARPU, Asia Pacific 75% and ROW 50%, and without factoring any user growth, that would add $5.7B of quarterly revenue.
As a reference, the all-time record in quarterly revenue that Facebook hit last quarter reached $3.8B. With this incremental growth right in its backyard, Facebook will get close to $10B of revenue per quarter.
7. Facebook is boldly preparing the future
When you buy Facebook, you also buy the potential upside associated with exciting things like Oculus Rift…
Zuckerberg paid a scary $22B to acquire WhatsApp and its 450 million users around the world. You can trust that he has something in mind to monetize this investment.
Facebook is also investing in its own search engine capabilities to potentially compete with Google…
Even if Facebook does not distribute any dividend, I am convinced that given its recent performance, talented leadership and bright prospects, Facebook deserves a consideration in any long term portfolio and certainly mine. I currently own 20 shares of Facebook (since March 2013) and intend to add 13 shares in the next 30 days. What do you think?