In late 2018, I invested about 10% of my total portfolio in Facebook stock. At the time, the company was still in the thick of the Cambridge Analytical scandal. And public trust in Facebook took a huge hit. Regulators increased oversight and billions of dollars in fines followed.
As a result, Facebook shares dropped more than 30%. But with my understanding of the company’s financial position, marketing potential and technologies, I swooped in. And fast forward to the recent market drop, I almost double downed on the position.
As much as many people love to hate Facebook, it’s built a robust ecosystem of platforms (including: Messenger, Instagram, WhatsApp and many others). Facebook has improved billions of lives around the world. And one of the biggest ways, the company has made keeping in contact with friends, families and communities much easier and more enjoyable.
Now, before we dive deeper into why I invested in Facebook stock, I really want to hit this first point home. Anyone can use Facebook’s core platforms for free. And no one has to use them. There are plenty of alternatives… but people continue to use Facebook’s services. That speaks volumes to the quality and ease of use.
Sure, Facebook and Mark Zuckerberg have misstepped. But when running a company with over 2.6 billion monthly active users, I expect public criticism and mistakes. In fact, I’d be worried if I didn’t see any big mistakes. And ultimately, I believe in the steps the company is taking to fix its issues, as well as preventing future problems.
Facebook Stock Follows Advertising Revenue
Facebook’s revenue has climbed from just under $2 billion in 2010 to over $70 billion in 2019. That’s a 3,489% increase in less than 10 years. And I expect 2020 revenue to grow to around $78 billion, even with the economic shutdown.
One big trend in the advertising world has unlocked this growth and it’s going to push revenue even higher. The trend I’m talking about is the improvement of targeted advertising.
Facebook has more personalized data than Google. This is allowing Facebook to improve its ad targeting. Advertisers can hone in on customers and get more bang for their buck.
To put this change in perspective, here’s a quote from John Wanamaker, a pioneer in marketing…
Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.
This quote comes from over 100 years ago and shows the drastic change in advertising. Businesses can now track how effective their spending is down to the cent. And a cent today is worth a heck of a lot less than it was back then.
Facebook has a huge advantage with the user data it collects from its websites and apps. Other mediums such as TV, billboards and radio broadcasts simply aren’t as effective.
Continued improvements in targeted advertising should push Facebook’s revenue and stock higher. And Zuckerberg isn’t resting on his laurels. Some of Facebooks newer projects and acquisitions are putting the company ahead of the curve.
Before we look at those ventures and innovation, let’s look at just one more financial chart. Facebook’s growing free cash flow has allowed the company to pile up a war chest of cash…
It’s also good to note that debt was near zero for most of this timeframe. Although, over the last two years, Facebook has issued about $10 billion in debt. That’s less than a quarter of total cash and with interest rates so low, issuing debt can make more sense.
Overall, the company’s financial position is strong and the cash reserve provides a wide safety net. It also helps the company make big acquisitions to protect and expand its market share in different areas.
Investing in Facebook’s Future
Facebook is expanding in many industries but I’m just going to highlight two areas. These ventures might add billions to Facebook’s revenue and possibly even trillions of dollars. They will take many years to play out… but good thing I’m a long-term investor.
Facebook Cryptocurrency: One project I’m most excited about is Libra, Facebook’s jump into cryptocurrency. There has been a lot of regulatory pushback from around the world, but Facebook is dedicated to doing it right. It won’t roll out Libra until there’s regulatory approval. And if Facebook can get a better foot in the door in the payments industry, that’s huge!
I worked with a cryptocurrency company in Beijing close to five years ago. To say the least, I have some unique insight and I’ve shared why Bitcoin won’t work as a currency in the past. When it comes to creating a successful currency, wide adoption is vital. Facebook is one of the few companies that has the scale to make it happen.
Facebook Gaming and Virtual Reality: The video game industry is growing and Facebook is starting to claim a bigger stake. It’s had success with mobile games in the past but is expanding its gaming services. To compete with Amazon’s Twitch, Facebook rolled out a live videogame streaming platform.
On the gaming side, Facebook’s acquisition of Oculus, a virtual reality company, also ties in. It’s still in early stages but the potential is huge. And not only in the gaming industry. I might dedicate an article and video to the VR industry down the road, so stick around 😉.
Facebook is expanding in many other areas that have great potential. The company recently plopped down $400 million for Giphy, a company that lets users share short looping videos with no sound. That might seem like a big amount for likely an unprofitable company… but it will give Facebook insight into early trends forming.
Facebook is also expanding its stake in emerging markets. It recently invested $5.7 billion into Jio, an India based telecom network.
Overall, I’m excited to see how the company expands over the coming years. And hopefully my Facebook stock will show some solid returns. It’s the only non-dividend paying company that I own… but if things go well, Facebook might start paying a dividend in the years ahead.
If you’re interested in seeing one of my more recent investments, check out why I bought shares of Wells Fargo. It’s another company with a recent public image issue, but it’s cashflow is healthy.