The answer: People start speculating its fall

Over the last decade, Facebook has taken leadership in the social media sector, aimed at keeping people and businesses connected through sharing anything from comments, photos, videos, web links to life events. It is estimated that globally Facebook has c.50% of all posts and content shared online. The exceptional growth notwithstanding, the long term business proposition of social media firms continues to be hotly debated.

Most recently, researchers at Princeton University alleged that the propagation of Facebook, which boasts 1.23bn monthly active users (equivalent to c.17% of the global population), will ultimately reverse based on models used to project the spread of infectious diseases. While there are generally acknowledged flaws in the assumptions behind the model used, anecdotally, engagement by teenagers on Facebook has been dropping which also fuelled doubters.

But beneath the eye grabbing, often negative headlines we find reasons for investors to keep this potentially uniquely dominant company on the radar.

Like certain notable visionaries, namely Gates and Jobs, founder Mark Zuckerberg never finished his college degree and devoted himself to forming the company which he still owns just under 20% and has a market value of US$160bn. Despite the shares initially halving in 4 months post IPO, investors returned after the company started demonstrating strong uptake in its mobile platform. Mobile performance is important because social media, games, search engines & news portals, e-commerce and video streaming sites are all vying for user attention, and the consumer is spending increasingly more time browsing on mobile devices, such as smartphones, than traditional PCs. In 2013, Facebook’s mobile monthly active users grew 39% YoY, outpacing the 16% climb in total users.

Furthermore, the firm also benefits from the network effect, a desirable attribute that helps fuel growth and forms barrier to competition. In simple terms, the appeal of being connected to an enlarged group helps further attract new members. Sceptics would point to alternative social platforms, such as Twitter, LinkedIn, Pinterest, Google+, etc., and that usage of social media platforms is not exclusive and there is no one size fits all.  However, Facebook user engagement as measured by ‘likes’ increased by 69% YoY, last year, suggesting that activity on Facebook is strong and users are likely to be spending more time on the application.  This comes before accounting for Instagram, a rival site bought by Facebook which has 150mn users, and FB Messenger, the firm’s offering in instant messaging.

We also think there is a more nuanced advantage to Facebook in the depth of information it carries on its substantial user base from a marketer’s perspective. Facebook users often make public personal interests under its account profiles as well as a time line of comments, places you have visited and ‘likes’ – used to indicate association with a topic, which helps marketers gauge response to advertisements. While privacy is a sensitive issue and it is a business risk that needs to be managed, the potential to better match consumer profiles to product ads is clear. Facebook’s Graph Search, a search tool that is akin to Google but adapted for cross referencing user profiles, is an interesting long term development and underscores the depth of data Facebook holds. Despite earlier tongue-in-cheek test searches such as “current employers of people who like racism” yielding some high profile unexpected results, the point is that the tool is potentially very powerful and runs off Facebook’s ‘proprietary’ data.

None of the features mentioned are necessarily exclusive to Facebook and competitors do mimic each other. However, it is fair to say Facebook has a first-mover advantage in its large stock of existing users and its future success will depend on its ability to innovate and adapt to changing trends.

Felix Fok

Portfolio Manager

Disclosure of interest: Milford Funds Ltd. invests in shares of Facebook and Google on behalf of clients.