A Bull Thesis for Facebook Stock

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I am big time bullish on Facebook, but not for any reason you might expect.

Sure, their ad platform is great, much like Google’s is great, but they’re great in different ways.  Google is a great way to advertise when you’re wanting to find customers who know they want something. A customer searches for “luxury sedan” on Google, you know they’re interested in luxury sedans, if you sell luxury sedans, advertising on Google makes a lot of sense.

Facebook is different, Facebook doesn’t allow you to target terms, it allows you to target interests (and ages, marital statues, education, country of residence, etc), but interests are the important thing.  For instance I recently reviewed this cool new product called LifeStraw.  This is a water bottle with an internal filter built within the straw, and the filter can filter swamp water and make it safe to drink. In my opinion, every outdoor enthusiast be he a hunter, hiker, camper, snowmobiler, or whatever else, should own one of these. So you go to Google and buy an add for “water purification bottle” or “filtering water bottle” or “portable water filter” and you probably aren’t going to get a good response. People don’t know they need your product, they aren’t searching for it. So you go to Facebook and run the ad against people who say, like “The Appalachian Trail” or the TV Show “Survivorman” or “Pack Rafting” or just “Camping.” So people who need and could want to buy your product are exposed it without them having to realize it.

Both ad platforms have their benefits, depending on your product or goals. Personally, with my product, I get a better response with Facebook and pay a mere fraction per click that Google charges me. In this I feel as if Facebook has a lot of room to grow. If they just reached parity with Google in my cost per click their revenue from me would at least quadruple.

But that is all beside the point. Why am I really bullish on Facebook?  Because, more than any other site on the Internet, they can most accurately represent our identity.

Before Facebook identity wasn’t popular on the Internet, anonymity reigned. Facebook put your real name on your activity and people tend to behave differently (better) when using their real name in front of their family and friends (even grandma is on Facebook now afterall).  So, what benefit does having a third party verifier of your identity bring? Well.. where on the Internet is trust most required?

Transactions, Paypal, payments. Selling things on the Internet is a crapshoot often, people can be using stolen credit cards, or they can just be liars. They’ll get the product and file a chargeback. You have no way of verifying hardly any detail about them, you have to trust them to be good people and many people abuse that trust. Facebook is unique situated to be a better Paypal, a better Google wallet, a better Amazon payments, a better Yahoo merchants. They have over a billion members, they need a payment platform for members to send money to each other, or to pay merchants.

There is also a Paypal connection, Peter Thiel, board member of Facebook, first outside investor, one of the first suits in the business, and the cofounder of Paypal. I don’t know if this is good or bad. Thiel is no longer involved in Paypal since having sold it to eBay, but I could see him either dissuading Facebook from crushing his first baby, or using his unique position to help Facebook crush his first baby. Either way, if Facebook entered payments, I would short eBay.

I also use Facebook to interface with my customers. I think Facebook is perhaps underestimated as a B2C platform. I often wish I could accept payments from customers directly on my Facebook page. To me that feature also seems inevitable.

Imagine if Facebook gets into transactions like these, and takes 3% of each. The Visa business model. That is why I’m bullish on Facebook. Facebook as a transaction platform, I think it is inevitable, and when it happens, it’ll drive huge revenue gains.

The other catalyst in the offing is ad syndication. Google drives a significant portion of their revenue from advertisements served off Google sites, through their AdSense ad network they syndicate ads to content sites all over the Internet (including this one). As Facebook’s platform matures and their inventory grows, they may seek to do that as well. Speaking as a website publisher, people in this field have been clamoring for Adsense alternatives, if Facebook takes that step that will provide another gap up in revenue.

These things are sea change announcements, like Apple announcing their first phone or tablet. Facebook’s ad sales have been growing, they keep blowing away estimates when they report earnings, but if these things come to pass it’ll be whole new categories of revenue. That is why I’m bullish on Facebook.

Full disclosure: I’m long Apple, Google, Facebook. I currently have no positions in any other stock mentioned in this post nor do I intend to open any.

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