Three years since it listed publicly, Facebook shares have delivered a 34% annual compound growth rate driven by strong sales and earnings, out-gunning other tech giants like Apple, Amazon and Microsoft. This has catapulted the company to reach a market capitalisation of US$250b, making it the fastest company to reach such a high market value.

So how has it grown this fast?

Facebook is known as a social networking platform but it’s really an advertising firm in disguise. Generating revenue from selling targeted ad space on its site and allowing companies themselves to host pages with brand images, messages and videos.

Facebook is an impressively unique asset, collecting pools of users with detailed history of preferences. These highly ‘sticky’ users generally don’t leave for an alternative platform due to the connections and profile information already set up, and instead come back to Facebook at a rate of close to 1 billion users per day. 

Facebook also has a stable of other assets including (Facebook) Messenger, WhatsApp, which is a fast growing mobile messaging service purchased by Facebook for US$19b in 2014, and Instagram, another fast growing social networking site, purchased by Facebook in 2012 for US$1b but is likely worth much more now as monthly users grew to 200mn. 

These other assets add users to the overall Facebook platform and encourage more time spent on Facebook’s sites and applications. A more nuanced point is how usage of these applications requires personalised logins and profiles. This lends itself to user activity tracking and data collection, allowing more targeted ads and messages by Facebook’s marketer clients.

In addition to these productive assets Facebook has done a great job of leveraging operating efficiencies. As the top two new advertising companies, Google and Facebook require 5x fewer employees per $10m of sales versus traditional agencies. Proficiency in and availability of software tools that help marketers manage budgets and bid for ad slots real-time using pre-set criteria (known as programmatic ad. buying) is reducing the amount of human management.

In summary, Facebook has done a tremendous job of continuing its incredible growth rate since the company was founded out of Mark Zuckerberg’s Harvard dorm room in 2004. It’s proven to be a very serious business with hard-to-replicate assets, a viable revenue model and still a lot of untapped potential.

 

Felix Fok

Portfolio Manager

Disclosure of interest: Milford Funds Ltd. holds shares of Facebook, Apple and Google on behalf of clients.

Disclaimer: This blog is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.