Tuesday, November 18, 2014

The Future of Facebook

     On October 28th Facebook released its FY14 Q3 earnings report, which was followed by an earnings call to investors. The company beat earnings per share and revenue expectations by $0.03 and almost 3% respectively. However, even though Facebook beat analysts’ expectations their share price was down almost 10% in after-hours trading. This sharp decline was due to CEO, Mark Zuckerberg’s, announcement that Facebook was expecting to increase expenses in FY15 by anywhere from 50-70%. The announcement of such a large rise in expenses stems from Zuckerberg’s future plans for the company, and his warning that 2015 would be a “major investment year for the company.”
     Even after Zuckerberg explained his multi-faceted three, five and ten year plan for the future of Facebook some investors became nervous and began to unload their holdings. It’s not surprising to see investors get scared after news like this, Amazon announced a similar plan to increase expenses earlier this year and they have performed less than adequately since then. However, unlike Amazon and other internet giants (e.g. Twitter, LinkedIn, etc.) Zuckerberg seems to be steering Facebook in the right direction even if some investors are skeptic.
     The goal of 2015 is to invest heavily in a plethora of acquired assets that can be developed into streams of future cash flows. The outlook over the next 3 years for the company mainly focuses on improving the quality of currently used features in order to help continue the increasing percentage trend of monthly active users (MAU) and daily active users (DAU). This encompasses mobile app development (which already accounted for 66% of the company’s total revenue), and improvements for 3rd party advertisers. By improving the way Facebook promotes advertising they will allow companies to target users more specifically and measure their marketing effectiveness. These shorter-term goals will help strengthen the company’s current revenue streams and allow them to focus on other endeavors down the road.
     The next step in Zuckerberg’s plan is his five year outlook. Recently Facebook has been buying a multitude of different companies such as Instagram, WhatsApp, as well as promoting their own domestic products like Search and Newsfeed. Thus far these moves have not helped Facebook’s revenue growth, especially WhatsApp which lost $140 million dollars in 2013 in comparison to its $10 million gains. However, Zuckerberg is not worried about these assets producing revenue in the short-term. Over the next 5 years the company hopes to see continued growth of these applications with a goal of connecting at least 1 billion users. Once each of these applications has amassed their targeted amount of active users, Zuckerberg plans on implementing an aggressive monetizing strategy across all fronts.
     In addition to the future monetization of their acquired offshoot companies, Facebook has even bigger plans for down the road. Within 10 years Zuckerberg hopes that Facebook will be playing a leading role in the development of the next generation of computing platforms. On March 25th of this year Facebook announced its purchase of Oculus VR and industry leader of virtual technology. This acquisition has positioned Facebook to be at the forefront of implementing augmented reality at a consumer level. These future plans convey the opportunities that Facebook has to become an even larger, more profitable, worldwide internet giant.

http://www.streetinsider.com/Analyst+Comments/Facebook+%28FB%29+PT+Trimmed+at+BofAMerrill+Lynch%3B+Self-Inflicted+Pain+Should+Yield+Long-Term+Benefits/9953343.html

http://seekingalpha.com/article/2627345-update-facebook-q3-earnings-cooler-heads-should-prevail

http://www.businessinsider.com/zuckerbergs-3-5-and-10-year-facebook-plan-2014-10

4 comments:

Unknown said...

As a frequent Facebook user I found the article that Scott found to be extremely interesting and eye capturing. I know some parts of this article like how Facebook had acquired multiple apps over the years but I was very interested on reading about what Zuckerberg has in store for Facebook users in the future.
When looking at what Facebook has to offer its users in the next three years I think they are doing every step possible in improving the social media site. The article mentioned that they are mainly focusing on improving the quality of features that are currently used in order to help continue the increased percentage trend of monthly active users as well as daily active users. These improvements also include improving the mobile app, which I feel as though can always be improved for the better.
Since one of the goals was to improve Facebooks advertising an order for companies to measure their marketing effectiveness, I would like to say that I don’t believe Facebook needs to spend much money on advertising. The argument by increasing Facebook’s advertising strategy is understandable but I do not believe it will create a boom for investors and users. I think how Facebook does their advertising now is the best way to advertise a social media website.
I agree with Facebook’s descision to constantly keep looking for new apps which they can buy and improve. I think that Instagram has been the smartest app that Facebook has added to it’s resume. Meanwhile I do not agree with them buying WhatsApp, it is not just because it lost $140 million dollars in 2013 in comparison to its $10 million gains. I see WhatsApp as controvercial to wireless companies who are banking on SMS messages to profit from. I feel like this may be a poor move for Facebook, even though the idea of the app is genius.
Zuckerburg’s head and vision seem to be in the right place in terms of the future of Facebook. It is great that his goal over the next 5 years is to see continued growth of these acquired applications as well as his goal of connecting to 1 billion users. I believe this is a goal that is within reach for Facebook and I cant wait to see the day when that goal turns into a reality.
With all of the moves that Facebook has done in the past seven years if Zuckerberg’s goal is to play a leading role in the development of the next generation of computing platforms, I believe that he can do this. I think in 10 years Facebook should have plenty of money to improve the next generation of computing platforms. I can see this dream of Zuckerberg’s to become more of a reality because of Facebooks recent purchase of Oculus VR an industry leader of virtual technology. This is very cool to me because it puts Facebook in a position to be ahead of the social media game in implementing a augmented reality at a consumer level. I agree with Scott’s statements here, I belive that with all of these future plans and recent acquisitions Facebook can potentially become an even larger, more profitable internet giant for the entire world.

Unknown said...

Facebook has been a very interesting stock to follow since its IPO in 2012 at $38 per share. Initially, investors were bearish on the stock, but with a CEO as intelligent and innovative as Mark Zuckerberg, you have to believe the stock’s only direction is up. As of recent, Facebook (FB) beat its Q3 earnings and revenue reports of 2014 by $.03 and 3% respectively. Although the reports were positive, the stock fell in after hours due to the announcement made by Zuckerberg stating the direction of the company. He stated that in 2015 Facebook would be experiencing increases in expenses due to their ventures in mobile and video advertising, acquisitions, and next generation computer platforms.

This news caused investors to dump their holdings in Facebook and ultimately drove down the company’s stock price. I felt that was very interesting because Zuckerberg’s announcement was about the future of the company and it’s potential growth as a result of extensive planning. I feel now is a great time to buy Facebook stock because of Zuckerberg’s announcement and the direction this company is going. Yes, I agree that Facebook make’s some outlandish acquisitions for incredible sums of money, but he clearly stated it’s on in the future plans. WhatsApp, for example, was acquired by Facebook for $18 billion and is that steep? Probably, but the application has 600 million active monthly users and if you tie in Facebook’s goal of connecting 1 billion people around the world, the purchase doesn’t seem so outlandish.

Also, these acquisitions are providing alternate revenue streams for Facebook almost acting like a diversification method within a portfolio. In 2012, Facebook acquired Instagram for $1 billion and people thought that was crazy, but now people are admitting to using their Instagram more frequently than their Facebook page. Basically, what I’m trying to get across is that Zuckerberg has a rhyme for every reason and I don’t think this coming year of 2015 should make people feel pessimistic about Facebook, but rather optimistic about the future. Also, Facebok recently acquired Oculus, which is a next generation computer platform, which basically brings video gaming to life. This is the future of gaming and Facebook sees the potential of growth within that market. Colleges are starting to put together video gaming teams and even more surprising is that students are receiving scholarships for it.

Along with its aggressive acquisition tactics, Facebook has made it clear that it wants to compete with the giants like YouTube in the video advertising market. Could more advertisements deter users and especially the user growth that Facebook has been experiencing in the past 10 years? Possibly, but adding yet another revenue source means Facebook would take market share from YouTube and other large companies like Yahoo and Google. The integration of video advertisements may not start off how Facebook would like to imagine, but I am confident that Zuckerberg and his team will find a way to make customers and users happy. It’s hard to really bet against an individual as intelligent and creative as Mark Zuckerberg.

http://en.wikipedia.org/wiki/Initial_public_offering_of_Facebook

http://www.streetinsider.com/Analyst+Comments/Facebook+%28FB%29+PT+Trimmed+at+BofAMerrill+Lynch%3B+Self-Inflicted+Pain+Should+Yield+Long-Term+Benefits/9953343.html

http://www.forbes.com/sites/ericjackson/2013/11/12/why-instagram-might-be-the-best-internet-acquisition-ever/

Pat.Donohue said...

Although this may not be the best soft term decision for investors in the long run this is the most profitable decision Zuckerberg could make for Facebook. Zuckerberg does not want to see his social media empire plateau or loose to another social media channel. In order to do this, Facebook must change with the times and remain innovative. Purchases such as WhatsApp and Instagram illustrate Facebook’s strive to remain on top. Personally I no longer find myself using Facebook on a daily basis and use it to stay in touch with family, and I am not alone with this trend as Facebook is losing a large demographic to other social media channels such as Twitter. With the ambitious purchase of Oculus VR also shows Facebook will continue to innovate. Zuckerberg’s plan of having a virtually reality Internet interface is quite extraordinary if he is able pull off this endeavor. However in the short term investors are weary of Facebook, as a year of mass expenditures will not result in able revenue for the risk associated with investing. As a long term investment this looks like a tremendous opportunity to buy and hold and watch in several years as the company continues to grow.

Unknown said...

Facebook is one of the more interesting stocks to follow in today's market. From what I can tell there really isn't much of a middle ground when it comes to opinions for future growth- you either love it or you hate it. I did a lot of research into this earnings call back when it was released and am impressed by Zuckerberg's ability to be patient. I think he monetized Facebook perfectly and will do the same with the rest of his acquisitions. I've heard he has been waiting until Instagram and WhatsApp break the one billion user milestone before fully implementing monetization strategies.

The company has a lot of uncertainty ahead of it. Revenues are undoubtedly going to keep growing but are the decisions management is making the correct ones? Some may argue WhatsApp was an incredible waste of money, however the app boasts somewhere over 600 million users. Its a bit of a pricetag to acquire the eyes of so many useres Zuckerberg mostly already has through Facebook. When analysts spite the increbily large price spent on WhatsApp they must also keep in mind how cheap the acquisition of Facebook was almost 5% of what they spent on WhatsApp.

I think Facebook has a very promising future ahead of it. Advertising revenues will continue to climb as technology becomes more targeted. The plan laid out is plausible and intelligent, however I think Facebook is trying to become something they're not. It is interesting to see them acquire their first physical peace of hardware and how they will handle its implementation. Its definitely a next generation technology that if marketed in the right way could take off.

All in all It look like it costs a lot for Facebook to grow.

The number of users are slowly climbing at 1.35 billion, but ads are getting smarter and plans are in store to make money from the so-far revenue-less Instagram and WhatsApp.

It looks like investors are nervous about the investment in more employees and salaries needed to capitalize on those huge opportunities.

It has been slowly climbing back to it price before the report and I think it will continue to grow. I am long on Facebook.