My last post about Facebook (FB) back in February speculated that its 15% valuation premium to Amazon was not justified (the spread has since narrowed and I continue to feel the same way today) but this post is more general in nature. Perhaps Mark Zuckerberg’s biggest challenge is figuring out what’s next for Facebook. He would likely admit privately that overall Facebook usage is likely to decline over time. Calling the site/app a fad is too harsh, but Facebook has already lost some of its cool factor (once your parents and grandparents are using the service, kids are likely to move on to something else) and it is entirely reasonable to expect that the average user today will spend less time on Facebook on a daily basis five years from now than they do now. So how does the company evolve?
I find this an interesting question because technology companies did not always move this fast. It used to be rare (and still is, to a large degree) that tech companies were much more focused. They rarely made 180-degree turns and ventured into completely unchartered territory, and those that did often failed (Microsoft, for instance, has maintained its lead in enterprise software, but has had numerous duds trying to gain traction in the hardware market — think Zune, Surface, Windows-based phones, etc).
In recent years, however, two companies in particular have challenged this focused strategy; Amazon (AMZN) and Google (GOOG). Jeff Bezos started out selling books online and now he will gladly sell you physical books, digital books, as well as Amazon-branded digital book readers, tablets, and streaming television devices. But it doesn’t end there. Amazon has cut out the middleman and now has its own book publishing unit, television production company, and game development studio. If something makes it more likely and/or easier for you to use Amazon, they are going to consider making it. It might seem like a disorganized strategy, but most of these products and services fit together in some way, if you take the time to think it through.
Google is very much doing the same thing, but it’s various special projects are less obvious in terms of cohesiveness. When you have hundreds of millions of people using your email service, file storing service, and search engine, it makes sense to sell your own tablets and phones (to make it easier to access those services and therefore less likely you will switch to a competitor). Self-driving cars and internet-connected eyeware do not exactly fit that mold, but when you have the money, desire, and brainpower to venture into new and exciting areas, why not? If not Google, then who?
With its IPO behind it, I think Facebook finds itself in a similar position. They have a bilion users, billions of dollars in the bank, and thousands of excellent engineers. As Mark Zuckerberg has stated publicly, the future of Facebook is not about the blue app on your phone (another indication he knows the original Facebook service will fade over time). Facebook’s future success depends on its ability to move into new areas and succeed in doing so. With a hugely valuable stock and plenty of cash, Zuckerberg has placed two big bets in recent months; $19 billion to acquire the WhatsApp messaging service, and $2 billion to acquire virtual reality goggle maker Oculus. Are these the right moves? Will the next five moves he makes be largely successful when we look back five or ten years from now? These are open questions.
Right now Wall Street is giving Facebook the benefit of the doubt. As an investor, I am more skeptical. While Facebook could certainly be the next Google or the next Amazon, I think it might be a tougher task for Facebook to succeed with the “go anywhere” tech strategy. Google will bring in over $65 billion in sales this year. Amazon will come close to $90 billion. Facebook is projected to be around $11 billion. And yet Facebook is worth more than Amazon and about 40% of Google, based on current equity market values. Of the three, I like Amazon most from a stock perspective as of today. Of the three, I think Facebook has the most risk, the most to prove, and the shortest track record from which to predict success.
It will be fascinating to see where Zuckerberg takes the company over the next few years, and whether he can come to dominate multiple domains like Amazon and Google have. These three companies have changed what technology business models look like, and for their efforts now sport a combined stock market value of two-thirds of a trillion dollars. Not bad considering that none of the three companies even existed in 1993.
Full Disclosure: Long Amazon at the time of writing, but positions may change at any time.