According to Facebook Inc., Facebook is a platform to give people the power to build community and bring the world closer together.
In reality, it is a web-page, where people can create their personal page for Free.
Daily active users on Facebook reached 1.52 billion, up 9% compared to 2017, led by growth in India, Indonesia, and the Philippines. This number represents approximately 66% of the 2.32 billion monthly active users in Q4 2018. Monthly Average Users grew 191 million or 9% compared to last year.
Around 2.7 billion people worldwide used one of the Facebook applications in December 2018 and on average over 2 billion people were active daily. The Facebook application includes Facebook, Instagram, Messenger, and WhatsApp.
Creating a Facebook profile will cost a marginal amount for Facebook. Every month, instead of 20 million people, if 40 million people signed up for Facebook, the operating cost will not double.
This is the beauty of tech companies, which is often overlooked by investors especially value oriented investors.
Nevertheless, it is not quite free for the company. The investment in the software and data centers are already made. Now, hosting and other hosting related costs are all that is added to the cost of operation.
There are 2.3 billion Facebook users and the operating cost per month is around $775 million. The average operating cost is approximately $0.24 per user per month.
Monthly Active Users (In millions). Source: Facebook 10K
In 2018, Facebook earned an average revenue of $2.08 per user per month.
For every additional user, Facebook makes an operating profit of $1.84. At the current rate of net income, the marginal net income will be $0.83 per user per month.
According to the World Bank, there are over 7.5 billion people in the world and the world’s population is expected to max out at 11 billion. Our generation will probably see this threshold reached.
What is the total market for Facebook?
The total market for Facebook is the world’s total population i.e. 7.5 billion now. And the expected peak of 11 billion in the future.
A Facebook profile per every person in the world is the dream of Mark Zuckerberg.
Assuming all the world population join the Facebook community, the total revenue will be 187 billion. And, let’s look at seemingly a perfect scenario. Assuming the expected peak of 11 billion population will join the Facebook community in the future, and all the world population will be developed, Facebook will earn 1.2 trillion dollars a year.
This quientaessential situation will lead to a net income of $493 billion. Almost as much as current market capitalization.
Don’t get too excited! This is all hypothetical assumptions.
Although, looking at the current market capitalization, it seems like investors are imagining this very scenario.
However, we would like to discuss a little bit about what will stop Facebook from achieving this landmark.
What could go wrong is the main concern of long term investors. Charlie Munger says “Invert always Invert”.
Some roadblocks are minor and some are major.
Technology is a minor concern. It is scalable with the addition of data centers and servers. The world wild web network is growing constantly. Sooner or later it will connect every homo sapiens in this planet and beyond. It is a shared burden of Governments and companies.
The major roadblock is Government and rules pertinent to their geographical region. The rules and regulations and actions by governments that restrict access to Facebook or other products in their countries are prime hinderance. For example, user access to Facebook and certain of other products have been or is currently restricted in whole or in part in China, Iran, and North Korea.
If United States government decides that Facebook is harmful to the children or society and it bans Facebook in its territory, the consequence will be devastating. Any rules governing free data flow will also hinder the Facebook’s growth.
If a majority of our elected officials at the upper and lower house think Facebook is harmful and the President agrees with it, Facebook will be deemed harmful.
We can protest but that is about it. This is called power of majority in democracy.
Change is another major force in this endeavor. Facebook’s new products and changes to existing products could fail to attract or retain users. Maintaining and enhancing the Facebook’s brands is critical to expanding the base of users, marketers, and developers. Many of Facebook new users are referred by existing users. Maintaining and enhancing brands will depend largely on the ability to continue to provide useful, reliable, trustworthy, and innovative products, which Facebook may not do successfully.
4. Cyber Attack
Cyber attack is another major roadblock. The technology industry is prone to cyber-attacks by third parties seeking unauthorized access to users’ data or to disrupt the ability to provide service. Any failure to prevent or mitigate security breaches and improper access to or disclosure of user data, including personal information, content, or payment information from users, or information from marketers, could result in the loss or misuse of such data, which could harm Facebook business and reputation and diminish their competitive position. In addition, computer malware, viruses, social engineering (predominantly spear phishing attacks), and general hacking have become more prevalent in the tech industry, have occurred on Facebook systems in the past, and will occur on their systems in the future.
Management is another major hurdle. Facebook needs competent leaders with laser sharp vision for decades to accomplish this mission. This is not impossible but surely strenuous. Once the leadership baton is passed down to the next generation of leaders by Mark Zuckerberg, the vision will dillude.
Everyone can create Facebook page except in the following case.
- You are under 13 years old (or the minimum legal age in your country to use our Products).
- You are a convicted sex offender.
- Facebook previously disabled your account for violations of our terms or policies.
- You are prohibited from receiving our products, services, or software under applicable laws.
What difference does it make if you have a Facebook page or not?
Well, it really depends.
First, if a lot of your close friends and family have a Facebook page, it is almost a desired platform to communicate. So, you do not want to be out of it unless you do not want to be in touch with them. In this case, it is a must-have.
Second, if you desire to get information about something, Facebook is a desirable place to get information. Assuming you are getting the information from the right source.
Can you get those things outside Facebook?
The second one is yes. But it will be slow and probably you have to purchase it (Books, newspaper, subscription…). First one is maybe if all of your friends and family are in close proximity. If not, you have to either use facebook or something of a similar kind.
By and large, you can live without a Facebook profile. However, it will make your life difficult and simple at the same time.
Nonetheless, you can live without a Facebook Profile. Though, how will you connect with people or get information or sell stuff are the key questions.
If Facebook is a country, it will be almost as big as China and India combined. Although, Facebook is banned in China.
Almost 2 billion people are restricted to use Facebook. Sooner or later, those dictatorial government will have to pick between being thrown out or give rights to free speech. This will drive up Facebook users.
Also, Facebook is and will gradually increase its user base. As the internet network is connecting the world, Facebook is taking advantage of it. This is a tailwind for tech companies like Facebook.
We believe Facebook is in the early phase of its monetization. It will deliver a lot more profits in the future, as users are growing and engaging more.
Disclaimer: Long position.