Q2 2021
By Manuel Maurício
August 19, 2021
Let’s start by looking at a few key metrics and then talk about all the initiatives, products, and future plans for Facebook.
On the second quarter of 2021, the revenue has hit a record high of $29 Billion dollars.
This growth has come mostly from the increase on the average price per ad, not so much the growth in impressions.
As the bidding process for placing adds on Facebook is an auction, the more people wanting to get a piece of online real-estate, the higher the price.
I’m not sure if Facebook influences the price or if it’s fully market driven.
If I were to bet, I would say that a good part of it is market driven.
And how beautiful it is to see the growth from the second quarter of 2020 onward.
It blew away every excel model out there.
… and with higher revenue came higher operating income…
And higher margins as well.
A 1 trillion dollar company growing at 55% with 43% margins.
Ben Graham would be turning in his grave.
THE METAVERSE AND THE NEW COMPUTING PLATFORM
“(The Metaverse) It’s a virtual environment where you can be present with people in digital spaces. You can kind of think about this as an embodied internet that you’re inside of rather than just looking at. We believe that this is going to be the successor to the mobile internet.” Mark Zuckerberg
On my write-up of March 2020 I wrote the following:
“They’re building dozens of these (data centers) around the world. This isn’t just to house messages or photos. These will be crucial for everything Facebook will build in the next 20 years. And they’re building them right now. Talk about long-term view.”
and also,
“A lot more must be planned to justify all this massive infrastructure around the world. I’m thinking gaming, Virtual Reality, Augmented Reality, wearables, etc, etc.“
While I was reading the most recent conference call transcript, I couldn’t help but feel that “The Zuck” is a few years ahead of all of us.
He hints at things that make feel a bit left out in the dark.
It’s like he knows things that I don’t.
And that’s true.
Just read this out:
“I think digital goods and creators are just going to be huge, right, in terms of people expressing themselves through their avatars, through digital clothing, through digital goods, the apps that they have, that they bring with them from place to place.” Mark Zuckerberg
What does he mean by “the apps that they have, that they bring with them from place to place”?
Maybe this will help.
“A lot of the metaverse experience is going to be around being able to teleport from one experience to another. So being able to basically have your digital goods and your inventory and bring them from place to place, that’s going to be a big investment that people make.” Mark Zuckerberg
Sooo, is Zuck hinting at a virtual world where, just like video-games today, both children and grown ups will be buying digital stuff?
But how will that materialize?
It’s like I’m seeing something behind a curtain of smoke and Zuck is there, but I can’t reach him.
And he’s not there alone.
On the latest Conference Call he mentioned that, for the Metaverse to become true, a lot of companies will have to work together.
He even mentioned NVIDIA making the chips.
Coincidentally enough, a few days later I saw this on Twitter:
On the podcast Ações & Companhia, where I’m accompanied by my dear subscribers Gonçalo Garcia and Diogo Gonçalves, there has been a recurring theme called “Scale Economies Shared”. Think about Amazon or Costco.
As these companies grow bigger, instead of exerting their pricing power to grow their margins, they do the exact opposite, they lower their prices. This creates a flywheel effect that is very hard to challenge. Low prices leads to larger scale, which leads to lower prices…
As I was reading the following quote (where Mark can’t help but take a jab at Apple), I was wondering if Facebook isn’t going the same route as Amazon or Costco.
“Our business model isn’t going to primarily be around trying to sell devices at a large premium or anything like that because our mission is around serving as many people as possible. So we want to make everything that we do as affordable as possible, so as many people as possible can get into it and then compounds the size of the digital economy inside it.” Mark Zuckerberg
CREATORS AND COMMERCE
Facebook wants to become a super app, like an operating system for everything online.
It wants users to be able to build their shops, subscription services, podcasts, videos, find jobs, sell houses, send emails, accept payments, manage their clients, etc.
It wants to bring a whole ecosystem in-house, be it by building these functionalities directly or by partnering with other companies.
“Our approach is to work our way down the stack and build world class services at every layer of commerce – starting from discovery at the top of the stack all the way down to payments. Just like we want to be the best place for millions of creators to make a living, we also want to be the best place for
businesses to grow as well.There’s a lot of work here to do to support all of the business tools natively that already exist for the web.” Mark Zuckerberg
and…
“We want to help solve all kinds of business needs, whether it’s customer relationship management, business messaging tools, or hiring through Facebook Jobs” Sheryl Sandberg
Did you notice Sheryl mentioning Customer Relationship Management (CRM)? It’s fairly easy to build a CRM these days, but it goes to show what these guys are aiming at: an ecosystem of business tools.
Something that kind of worries me is the realization that Facebook will favor ads pointing towards its own services. I’m starting to experiment with FB ads so All in Stocks can reach a wider audience.
At some point, Facebook will favor other content creators using Bulletin, its own platform for subscription based services.
Should I be switching to Bulletin?
It will take a while before all the apps and services I need will be integrated (mailing services, membership add ons, etc), but it’s coming.
“businesses are naturally going to want to pay to have their ads point towards that (Facebook properties) rather than other services that we may not control or that may be a worse experience.” Mark Zuckerberg
VALUATION AND CONCLUSION
Let’s say that Facebook will be making $120 Billion in revenue in 2021 and then growth declines to 10%.
In 2025, the revenue would be $176 billion. Is that too high?
In 2020, Alphabet made $182 billion in revenue, so $176 seems pretty doable.
By then, the company would be making around $45 billion in profits.
At a multiple of 20x, plus the cash that will be generated until then, we would be talking about a marketcap of $1.15 Trillion against the current $1.06 Trillion.
That would mean a 3% rate of return. Pretty lousy.
But this is my worst case scenario.
I believe that Facebook could be growing well above 10% per year for the coming 5 years.
Everybody’s all hyped up about Alibaba right now. I get it. When I researched Alibaba, I was impressed. Amazing business with amazing growth prospects (and now trading at a reasonable valuation).
But why would someone be bullish Alibaba and not Facebook? Facebook has Shops, Marketplace, Jobs, Workspace, Whatsapp, Subscriptions, Dating, Watch, Oculus…
Not all of these will be successful, let alone be able to dethrone the incumbents, but I believe it’s all about creating an ecosystem that users just can’t afford to abandon.
Whenever a new social mechanism (think short videos) arises, that’s a chance for Facebook to generate higher inventory (places where advertising can be shown to the user).
That’s why competition is, in a certain way, good for Facebook.
Facebook just needs to copy those new mechanisms that are proven to work (think how FB copied Tik Tok with Reels). Facebook doesn’t need to spend the dollars to create new, unproven mechanisms.
Yes, I’m choosing to see the bright side here.
Competition might just be the largest single risk to Facebook. But I believe that, as Facebook rolls out all of these ventures, it’s going to be harder and harder to take its place.
Over the Conference Call, Mark mentioned how their Artificial Intelligence systems are doing an amazing job helping them with privacy concerns.
He also hinted at the fact that his competitors are nowhere near that level of technological advancement and how it constitutes a tremendous competitive advantage.
To finalize, what other company can be compared to Facebook? What other company has messaging, video, e-commerce, creators, podcasts, payments, oculus, etc.?
Some might say Tik Tok is a threat. I’m still not an expert on Tik Tok, but I believe Tik Tok to be “just” a content provider, like YouTube or Netflix. It doesn’t have all the other stuff. At least for now.
And for a new guy in a garage, or in a Harvard dorm, to be able to come up with an app with all these features, well…. it will be hard.
So, coming back to Facebook, I believe this is a one of a kind business and that Mark Zuckerberg is one of the most amazing operators alive today.
As I’ve mentioned before, I’m tempted to increase my stake, but as the company is so prone to volatility whenever hot topics such as regulation or privacy are on the news, I’ll be looking to enter at a lower valuation if it comes about.
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