Based on Facebook Q3 2018 earnings report, Facebook has, on average more than 2 billion people that use at least one of their services every day. Those services are Facebook, WhatsApp, Instagram or Messenger. Here’s my long case on Facebook.

P.S. For those of you who do not know what is a “long”, it simply means that based on my personal analysis, I expect the stock price to rise from the current price. That is being “long” on a stock.

Summary

• Facebook’s differentiation is that they have a massive user base and sticky service.
• Future opportunities include monetization via payments services and shopping experiences in their app.
• The current problems of privacy and security, as well as top executives leaving, is manageable. Business strength remains intact.
• Overall, I think that Facebook is a great business selling at a fair price.

My Investing Philosophy Shift to Buying Good Business at a Fair Price

Being a big believer of Benjamin Graham, I believe that investment is most intelligent when it is most businesslike. Benjamin was a big fan of buying OK businesses at a cheap price. I think that this strategy still works most of the time – if we got the timing right and valuation on point, the rest will flow naturally. A good example is my investment in GameStop which stemmed from the angle of cigar butt investing. So far it has worked well and I have made good gains. So yes, I am still a believer of buying companies at an undervalued price no matter if it is a bad or just an OK company.

But over time, I would like to invest in good businesses at a fair price instead of continuing to invest in an OK business at a cheap price. Why so? There are good reasons for this. One of them is it is easier if we let our investment in a good company compounds over time. Instead of having to jump often from one investment to another as in the case of cigar butt investing. In cigar butt investing, the exit strategy need to be clear and fast. Because the business is usually in an industry that is dying. If we do not exit fast, we may miss the right exit point.

In a way, buying good businesses at a fair price is a longer-term endeavor than buying an OK business at a cheap price (in the case of cigar butt investing).

So I think Facebook is a wonderful business selling at a fair price. I came into this conclusion from both the quantitative and qualitative point of view. Of course, I took a stake in Facebook during the past few months and right now, it consists of about a quarter of my portfolio. I have been adding more of Facebook stock to my portfolio as it dropped further.

Long Case #1 on FB: Massive User Base

A key figure that we can take away from Facebook’s most recent (Q3 2018) earnings report is that they have a massive user base. Their community online and business continues to grow. Today, 2.3 billion people use Facebook every month, 1.5 billion people use Facebook every day. And this is just Facebook alone, not considering their other businesses such as WhatsApp, Instagram, and Messenger. Let that sink in for a moment and we will realize that Facebook has a massive user base. China population alone right now is only about 1.4 billion people. That means that every single day, more people use Facebook than the total number of people China has.

This massive user base is one of Facebook’s key competitive advantage. With a massive user base, Facebook is able to make more money through advertising. The bigger the user base, the more attractive Facebook is to advertisers. Advertisers are Facebook primary clients. Having a massive user base is attractive from the advertiser’s point of view. And one differentiation that that stands out about Facebook’s advertising solution is their ability to have an effective targeting for advertisements. Unlike their competitors such as SnapChat and Google, Facebook gives advertisers more ability to target their advertisements more effectively. This, of course, will result in better ROI for advertisers. That is why advertisers simply love Facebook.

Long Case #2 on FB: Sticky Service

It is one thing to have a massive user base and another thing entirely to be able to retain these users over a long period of time. Retaining of the users are important for Facebook. In fact, I would say retaining users should be the #1 priority for Facebook. If they are not able to retain users well, their competitive advantage that stemmed from the huge user base will slowly disappear.

Luckily, their services are very sticky. They are sticky because they are founded on the concept of the network effect. Network effect simply means, from the point of view of users – “my friend is using it, so must I, if not I will miss out.” It is also because of these “network effect” that Facebook got so big and so fast. The more people use Facebook, the more attractive it becomes for others who have not used Facebook. The usefulness of Facebook increases with the increase in the number of users.

Right now, Facebook already has 2 billion monthly users. I can foresee that due to the stickiness of their service, this number will only grow over time. There are a couple of reasons for their stickiness as well.

One of the reason is that Facebook has managed to build communities with a focus on creating groups. Facebook has provided the admin of those groups with tools to manage the communities easily.

Facebook is clearly a big part of many people’s lives. The communities inside of Facebook are created based on the different interests of the people inside of it. It is sticky because these are how people keep in touch with their friends and their families. These groups are 1 way for people to discuss their common interests – no matter where they are from. Facebook has managed to build a great platform that has the right focus – that is in building communities. By building communities around Facebook groups, they also made the world an even more connected place.

Based on an article by Forbes, in the past one year alone, Facebook group membership is already up 40%. Now, 1.4 billion people are inside Facebook groups. That is more than half of Facebook’s massive user base. Of those, 200 million users are already inside “meaningful groups” which are considered an important part of users’ daily lives. Mark Zuckerberg goal is that he would like to see 1 billion users in “meaningful groups” within 5 years from 2020.

And Based on a note by Mark on Facebook, he values Facebook groups. He shared that he personally also uses Facebook groups a lot. Mark is in fact also an admin of a group for people who love the game civilization. And he shared that he screen a bunch of requests from people who don’t actually play the game. He knows what people are going through. He even shared that some communities are more serious. Mark also created a group to support his dad who is recovering from heart surgery.

The idea for Mark’s new mission is actually to “bring the world closer together.” And their full mission statement is: give people the power to build community and bring the world closer together. This means that their focus is to empower people to build communities to bring people together.

“So now we’re setting a goal — to help one billion people join meaningful communities. If we can do this, it will not only turn around the whole decline in community membership we’ve seen for decades, it will start to strengthen our social fabric and bring the world closer together.” – Mark Zuckerberg

Instagram has been a great hit with millennial. In fact, millennials are using Instagram more than any other platform available right now, based on an article and research stated in business.com. 60% of Instagram users are between the ages of 18 and 29 with 42% of those users visiting the site at least once per day. Instagram is a huge part of the lives of many people, and so is Facebook. Instagram is as sticky as Facebook. In fact, I would say that for millennial, Instagram is more important to them than Facebook. Therefore, Instagram is especially sticky for millennial. A huge part of Instagram success in recent times was from the implementation of a new feature called Instagram Stories. In fact, now more people post in stories that they do posting on news feed. Based on Cnet and a disclosure by Facebook, over 250 million people already uses Intagram Stories on a daily basis.

WhatsApp and Messenger is also an important part of the lives of billions of people every day. People use them to chat and to do business. They are indispensable and sticky. And as Mark Zuckerberg has said in his most recent earnings call, they are seeing a new trend. The way people connect has begun to shift more to private messaging and stories. He said that while public sharing is important, there is a trend that resulted in people shifting more to sharing privately. Right now, around 100 billion messages are sent every day using their services. Even their Messenger service has a higher daily message volume than SMS had globally at their peak. These data shows just how sticky WhatsApp and Messenger is. They have become an integral part of people’s lives.

Facebook has built great businesses that are all very sticky due to the network effect. Their focus on building communities inside of Facebook will only enhance their stickiness over the long run. Instagram is a crucial part of millenial’s lives. WhatsApp and Messenger is a trusted platform for people to chat and conduct business. The network effect will continue for years to come for Facebook.

Long Case #3 on FB: Opportunities on Payments & Shopping

There are huge opportunities with WhatsApp and Messenger to implement basic features like payments.

“Our roadmap focuses on continuing to make WhatsApp and Messenger even simpler, faster and adding basic utility features like payments. We found that every time we make our services faster and simpler, people communicate more. We’ll also keep pushing our messaging services to be more private and secure, and we believe this will continue to be a competitive advantage for us.” – Mark Zuckerberg during Facebook’s Q3 2018 earnings call

And I fully agree with what Mark is saying above. Simpler is the way to go. Faster and more secure is essential to the future of their business. And these are all key to Facebook in maintaining their competitive advantage. There are huge opportunities for Facebook in the Payments space.

The ability to make payments via WhatsApp and Messenger can be a game-changer. Execution is key here. It has been rolled out in some places. Right now, based on TechCrunch, people are able to pay using WhatsApp Pay in India. This is the beta version of WhatsApp Pay. The payment system in India allow people to send money to other WhatsApp users – but still excluding merchant accounts. India is a good place to start because India is WhatsApp’s largest market with over 200 million daily active users. In due time, I think that WhatsApp Pay will definitely be rolled out to other countries.

In Facebook and Instagram, there are more opportunities in shopping.

“When you look at the Instagram Shopping experience, we’re seeing some really nice growth. We have 90 million people tap to reveal product tags and posts every month to learn more about them, and we’re putting real investments behind this. In Q3, we rolled out Shopping in Stories globally and began testing the Shopping Channel in Explore. And so, we think the opportunities are big.

As you think about commercial intent on Facebook versus Instagram, there’s so much activity on both. We think there’s a lot of opportunities for people to have commercial intent, if not have it when they start, but develop it because they see things they’re interested in, in both. Instagram can be more interest-based in some places than Facebook. So there are places in Instagram like Fashion or like Shopping that have very high signal, and that gives us I think a very strong opportunity there.” – Sheryl Sandberg during Facebook Q3 2018 earnings call

Based on what Sheryl said above, Instagram is serious in building a good shopping experience.

Based on The Verge, Instagram is working on a standalone app dedicated to shopping – which could be called IG shopping. The concept is that it will allow users to browse collections from merchants that they follow in Instagram. and be able to purchase these items directly within the app. It is still in the development phase, but they believe that they are in a good position to make a major expansion into e-commerce. And i concur. there are many “influencers” who influences people’s buying decision via Intagram posts. If Instagram is able to execute well, I cannot see what is stopping people from buying using IG app outright instead of going to other places. They key here is definitely execution. There are good opportunities to create a good shopping experience for IG users.

There are also a good potential for Facebook to tap into the e-commerce space. Right now, Facebook e-commerce functions are still very limited. This is in comparison to a specialized website like Shopify or Amazon. So people have not adopted Facebook to buy and sell their things. But I think that the opportunities are here for Facebook to go into the e-commerce space as well.

So the opportunities are definitely here for WhatsApp and Messenger to execute the Payments space and IG and Facebook to execute the Shopping space well. We will have to see if they are able to execute and scale properly in the next few years – while at the same time maintaining their user base and growing them.

Long Case #4 on FB: Willingness to Admit Mistakes

The Facebook privacy scandal started with the case concerning a political consulting firm called Cambridge Analytica. In summary, Facebook improperly shared users information on up to 87 million users (mostly in the U.S). This is a big case in the United States and around the world. It is important for a company to be willing to admit mistakes and fix their mistakes moving forward. And I think that from what I have seen so far, Facebook is willing to admit mistakes and learn from it.

“Protecting people’s privacy is incredibly important because people and businesses will only use our services if they feel Facebook can be trusted and if sharing on our platform is safe. That’s why we’re making significant ongoing investments to better protect privacy and security.” – Sheryl Sandberg during Facebook Q3 2018 earnings call

It is a relieve to know that Facebook is making ongoing investments to fix this privacy and security scandal. It is not an easy thing to fix. It will be even harder to fix as the number of users in the platform grow in the long run. And in doing more investments in privacy and security, Facebook’s earnings will definitely take a hit. I am also sure that Facebook will never be perfect even after making all these investments to better protect user’s privacy and their platform’s security.

But the good thing here is that Facebook is always very open to admitting that they still have work to do. And that is why they are making big investments in privacy and security – even though their earnings will take a hit. This is better for Facebook in the long run.

Potential Risks on FB: Solving The Issue of Invasion of Privacy and Top Executives Leaving Facebook

The current issue on the invasion of privacy for Facebook has been an ongoing problem. Undoubtedly, some people will stop trusting Facebook. But I think that the growth will continue – especially if Facebook succeed in preventing such privacy problems in the future.

There is another problem recently for Facebook and that is many top executives leaving in 2018. Jan Koum the co-founder of WhatsApp announced his exit in April via a Facebook post. Colin Stretch, Facebook’s top lawyer also announced he is leaving Facebook after more than 8 years. Elliot Schrage head of communications and public policy left Facebook after more than 10 years in the job. Dan Rose who was the VP of partnerships also left to join his family in Hawaii.

These are all not a small problem. But I think that Facebook as a business remains intact. They still have a good competitive advantage that mainly focuses on having a massive user base with the stickiness that comes along with it. And the really important key personnel for Facebook over the long run is their CEO, Mark Zuckerberg. He is still young and he still has a long runway to go into the future.

Conclusion: Weighing All The Pros and Cons, Facebook Stock is A Great Investment for Me

All in all, Facebook has a great suite of services: WhatsApp, Messenger, Facebook, and Instagram. These services all have a great differentiation with network effect as their core value proposition. They have a massive user base with a stickiness along with it. And despite top executives leaving and privacy and security concerns, the business strength remains intact and investments to solve privacy and security is underway.

Not to mention the huge opportunities in Payments and Shopping. If Facebook is able to execute well, imagine being able to transfer money to your friend simply by using your WhatsApp number alone. Imagine being able to conduct business and make business transfers just by using WhatsApp. I think that will simplify a lot of things for people.

Taking into account the risks and the opportunities, I am confident that the future will be brighter for Facebook than in the past.

Now, I am sure that there is a high probability that you also use Facebook. Notwithstanding these privacy concerns, do you still use Facebook, will you give it up to “secure your privacy”?