WEEKLY E-MAIL

5 July 2017

YOU PROBABLY OWN FACEBOOK SHARES…

By Patrick Malcolm

You may or may not know this, but you probably own Facebook shares.

Many of our clients through either their Self Managed Superannuation Funds, private investment portfolios or Colonial First State First Choice accounts have an investment in the Magellan Global Fund. As of the 31st of March 2017, the Magellan Global Fund had 3.8% of its portfolio invested in Facebook.

As you probably already know, Facebook is the world’s leading social network and is now worth over US$400 billion by market capitalisation due to a tripling in revenue over the past three years.

Facebook has built a position as the world’s core social platform by attracting 1.9 billion users each month, equivalent to about 30% of the world’s population it can reach given that the company’s network has been banned in China since 2009. Of this number, 1.2 billion people visit the core Facebook property each day. Facebook’s other properties – WhatsApp, Messenger, and Instagram – have 1.2 billion, 1 billion and 600 million users each month respectively.

The scale and pervasiveness of Facebook’s platform is unique. The company benefits from a strong network effect, which means as more people join the more valuable the network becomes to all users. Facebook users stay loyal because they can spend years building their online social community, participating with countless posts, photos, comments, ‘likes’ and events on the platform. The ‘news feed’ is unique for each user, filled with relevant content from friends and other connections. The last direct challenge to Facebook was in 2011 with the launch of Google+ but it was already too late. Even with the might of Google behind it and arguably Google+’s better functionality, the network effect had already made Facebook uncatchable. Such victories highlight how Facebook is a uniquely advantaged global digital platform.

Facebook could always fall short of expectations, of course. The amount of time users spend on Facebook may not grow as fast as expected and with it reduce the growth in advertising that Facebook can display to users. One way this could happen is if alternative platforms improve their ability to deliver interesting third-party content to users. Improved artificially intelligent assistants, like Siri or Google Assistant, may deliver competitive personalised content that takes time share from Facebook’s news feed. Another potential downside is that research and development costs and investments in non-core ventures could erode Facebook’s margins. But Facebook appears well positioned to overcome any challenges.

Highly engaged users

Two attributes in particular indicate a bright future for Facebook. The first is that Facebook users are highly engaged. In April 2016, Facebook revealed that the average user spends 50 minutes per day between Facebook, Instagram and Messenger, dwarfing competing social platforms, and that this number is growing at double-digit rates.

Another way to look at Facebook’s engagement is the share of its users who visit daily. Even as the number of its monthly active users has grown from 600 million in 2010 to 1.9 billion in 2016, the share of these users who visit its properties daily has increased from 54% to 66%. That means more users are visiting more often.

Facebook competes for people’s time and engagement with all other media, including TV, print, radio, messaging platforms and YouTube and yet time spent on Facebook properties keeps growing. New social networks, such as Snapchat, and messaging services, such as Line, have threatened engagement on Facebook as they have expanded and added functionality. However, despite the fresh competition, Facebook’s engagement keeps rising.

Advantaged in advertising

The second reason Magellan are confident about Facebook’s outlook is that the company is skilled at exploiting its network for advertising in three ways. Facebook’s big advantage in advertising is that its ad-targeting capabilities are best in class. By participating on the social network, users provide to Facebook a stream of information about themselves, others, issues and brands with whom they interact, their location and their intentions. This data is only available to Facebook and is valuable to advertisers. Armed with this exclusive data, marketers can pinpoint advertising campaigns.

The next advantage with advertising, which admittedly is generic to all internet-based media, is that Facebook has a better ability to measure ad performance than offline media like TV, radio and print. Online advertising better measures the effectiveness of advertising by monitoring the clicks that follow online ad exposures, and by monitoring offline store visits. Providing evidence of the return of money spent on advertising campaigns on Facebook gives marketers the confidence to increase their spending on the platform, often by reallocating it from traditional media.

Facebook’s other advantage with advertising is that it (and Google) are well positioned for the shift to mobile advertising such that in the 2016 Financial year when 97% of Facebook’s revenue of US$27.6 billion was generated from selling advertising, primarily on user news feeds, 84% was delivered on a mobile device. Mobile has grown to an estimated 20% of people’s media time (in the US); however, the smaller screen size has made effective advertising challenging on the devices. While few companies have found a solution, Facebook’s news feed ads and Google’s search ads work well. The result is that Facebook now boasts a share of about 32% of US mobile advertising spend compared with 6% on desktop.

Long runway

Magellan expect Facebook’s core business to grow at high rates. The number of Facebook users will likely increase, particularly in emerging markets, assisted by increasing smartphone penetration and better connectivity in these areas. They anticipate engagement of users on the core Facebook properties will rise as Facebook optimises its services. Facebook’s primary service, its news feed, aggregates socially targeted content – both user-generated and professional. Based on individual interaction with this content – clicks, comments and ‘likes’ etc. – Facebook tailors a unique experience for each user aimed at optimising engagement. It is constantly testing content and tweaking its placement algorithms.

Facebook contains some valuable stakes in nascent businesses that augur well for future profits. Its messaging platforms, Messenger and WhatsApp, each have over one billion monthly users yet currently generate no sales, while similar messaging platforms in Asia are already earning vast revenue. Facebook has invested early into virtual reality to shape the evolution of a new content format. Finally, advertising to targeted searches of its unique social database could prove extremely valuable to marketers, particularly when complemented by expected developments in artificial intelligence and Facebook’s digital assistant, M.

Facebook’s core business alone presents an attractive investment. These additional businesses provide the potential for material additional upside as Facebook offers more and better services to its billions of engaged users.

Patrick Malcolm
Partner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 278061

If you have any questions or comments, please email me at patrick@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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