FACEBOOK
Raunak Onkar, fund manager and head of research, PPFAS
Facebook is the representative of the Facebook Family of apps - the blue Facebook app, WhatsApp, Instagram and Facebook Messenger. It generates 97% of its revenues from digital advertising and the rest from its platform services.
Combined Facebook Family has about 3 billion daily active users worldwide; a lot of eyeballs to show targeted advertising. Google and Facebook in many markets enjoy 70%+ market share of digital advertising revenue. It's a strong and many times, cost effective platform which has in a way democratised advertising from the smallest of the businesses wanting to reach specific audiences to the largest of the companies to use them as branding platforms. Social platforms have also provided entrepreneurship opportunities for countless influencers who keep bringing the user traffic back to these platforms.
Ali Mogharabi, Morningstar senior equity analyst
- Economic Moat: Wide
- Economic Moat Trend: Stable
- Fair Value: $215
- Fair Value Uncertainty: High
- Stewardship Rating: Standard
We assign Facebook a wide moat rating based on network effects around its massive user base and intangible assets consisting of a vast collection of data that users have shared on its various sites and apps. Given its ability to profitably monetize its network via advertising, we think Facebook will more likely than not generate excess returns on capital over the next 20 years.
Now that Facebook has emerged as the clear-cut social media leader, we believe that the company’s offerings, consisting mainly of Facebook, Instagram, Messenger, and WhatsApp, have further strengthened network effects for the firm, where all of these platforms become more valuable to its users as people both join the networks and use these services. These network effects serve to both create barriers to success for new social-network upstarts (as demonstrated by the firm’s success against Snap), as well as barriers to exit for existing users who might leave behind friends, contacts, pictures, memories, and more by departing to alternative platforms.
In terms of risks, we believe that while barriers to exit for the 2.5 billion users may be increasing, the risk of another disruptive and innovative technology, more recently TikTok, coming on to the scene and luring users away from Facebook and its apps remains. We do not expect competition in the form of a substitute for Facebook, as most consumers are users of more than one social network. However, given the fixed number of hours per day, an increase usage and engagement on one social network could come at a cost to other social networks, reducing user engagement and the potential return on investment for advertisers. Decline in ads would hurt Facebook’s top and bottom line, reducing return on invested capital and the firm’s fair value. Furthermore, even with Facebook’s dominant position in the social network market, its high dependence on continuing growth of online advertising could heighten the negative impact of a lengthy downturn in online ad spending on the company, resulting in a much lower fair value estimate.
The risk remains that limitations could be imposed by regulatory agencies around the world on what user and usage data Facebook can compile and how the data can be utilized. In addition, some governments may simply forbid access to Facebook, which could result in lower user growth and user interaction.
