by Adam Hartung | Jan 8, 2014 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech
Most investors really aren’t. They are traders. They sell too fast, and make too many transactions. That’s why most small “investors” don’t do as well as the market averages. In fact, most don’t even do as well as if they simply put money into certificates of deposit or treasury bills.
I subscribe to the idea you should be able to invest in a company, and then simply forget about it. Whether you invest $10 or $100,000, you should feel confident when you buy a stock that you won’t touch it for 3, 5 or even 10 years. Let the traders deal with volatility, just wait and let the company do its thing and go up in value. Then sometime down the road sell it for a multiple of what you paid.
That means investing in big trends. Find a trend that is long-lasting, perhaps permanent, and invest in the leader. Then let the trend do all the work for you.
Imagine you bought AT&T in the 1950s as communication was about to proliferate and phones went into every business and home. Or IBM in the 1960s as computer technology overtook slide rules, manual databases and bookkeeping. Microsoft in the 1980s as personal computers became commonplace. Oracle in the 1990s as applications were built on relational databases. Google, Amazon and Apple in the last decade as people first moved to the internet in droves, and as mobile computing became the next “big thing.”
In each case investors put their money in a big trend, and invested in a leader far ahead of competitors with a strong management team and product pipeline. Then they could forget about it for a few years. All of these went up and down, but over time the vicissitudes were obliterated by long-term gains.
Today the biggest trend is social media. While many people still decry its use, there is no doubt that social media platforms are becoming commonplace in how we communicate, look for information, share information and get a lot of things done. People inherently like to be social; like to communicate. They trust referrals and comments from other people a lot more than they trust an ad – and often more than they trust conventional media. Social media is the proverbial fast flowing river, and getting in that boat is going to take you to a higher value destination.
And the big leader in this trend is Facebook. Although investors were plenty upset when Facebook tumbled after its IPO in 2012, if you had simply bought then, and kept buying a bit each quarter, you’d already be well up on your investment. Almost any purchase made in the first 12 months after the IPO would now have a value 2 to 3 times the acquisition price – so a 100% to 200% return.
But, things are just getting started for Facebook, and it would be wrong to think Facebook has peaked.
Few people realize that Facebook became a $5B revenue company in 2012 – growing revenue 20X in 4 years. And revenue has been growing at 150% per year since reaching $1B. That’s the benefit of being on the “big trend.” Revenues can grow really, really, really fast.
And the market growth is far from slowing. In 2013 the number of U.S. adults using Facebook grew to 71% from 67% in 2012. And that is 3.5 times as often as they used Linked-In or Twitter (22% and 18%.) And Facebook is not U.S. user dependent. Europe, Asia and Rest-of-World have even more users than the USA. ROW is 33% bigger than the USA, and Facebook is far from achieving saturation in these much higher population markets.
Advertisers desiring to influence these users increased their budgets 40% in 2013. And that is sure to grow as users and their interactions climb. According to Shareaholic, over 10% of all internet referrals come from Facebook, up from 7% share of market the previous year. This is 10 times the referral level of Twitter (1%) and 100 times the levels of Linked in and Google+ (less than .1% each.) Thus, if an advertiser wants to users to go to its products Facebook is clearly the place to be.
Facebook acquires more of these ad dollars than all of its competition combined (57% share of market,) and is 4 times bigger than competitors Twitter and YouTube (a Google business.) The list of Grade A advertisers is long, including companies such as Samsung ($100million,) Proctor & Gamble ($60million,) Microsoft ($35million,) Amazon, Nestle, Unilever, American Express, Visa, Mastercard and Coke – just to name a few.
And Facebook has a lot of room to grow the spending by these companies. Google, the internet’s largest ad revenue generator, achieves $80 of ad revenue per user. Facebook only brings in $13/user – less than Yahoo ($18/user.) So the opportunity for advertisers to reach users more often alone is a 6x revenue potential – even if the number of users wasn’t growing.
But on top of Facebook’s “core” growth there are new revenue sources. Since buying revenue-free Instagram, Facebook has turned it into what Evercore analysts estimate will be a $340M revenue in 2014. And as its user growth continues revenue is sure to be even larger in future years.
Even a larger opportunity for growth is the 2013 launched Facebook Ad Exchange (FBX) which is a powerful tool for remarketing unused digital ad space and targeting user behavior – even in mid-purchase. According to BusinessInsider.com FBX already sells to advertisers millions of ads every second – and delivers up billions of impressions daily. All of which is happening in real-time, allowing for exponential growth as Facebook and advertisers learn how to help people use social media to make better purchase decisions. FBX is currently only a small fraction of Facebook revenue.
Stock investing can seem like finding a needle in a haystack. Especially to small investors who have little time to do research. Instead of looking for needles, make investing easier. Eschew complicated mathematical approaches, deep portfolio theory and reams of analyst reports and spreadsheets. Invest in big trends that are growing, and the leaders building insurmountable market positions.
In 2014, that means buy Facebook. Then see where your returns are in 2017.
by Adam Hartung | Feb 11, 2012 | Current Affairs, In the Rapids, Innovation, Leadership, Television, Web/Tech
Buy Facebook. I don't care what the IPO price is.
Since Facebook informed us it was going public, and it's estimated IPO valuation was reported, debate has raged over whether the company could possibly be worth $75-$100B. Almost nobody writes that Facebook is undervalued, but many question whether it is overvalued.
If you are a trader, moving in and out of positions monthly and using options to leverage short-term price swings then this article is not for you. But, if you are an investor, someone who holds most stock purchases for a year or longer, then Facebook's IPO may be undervalued. The longer you can hold it, the more you'll likely make. Buy it in your IRA if possible, then let it build you a nice nest egg.
About 85% of Facebook's nearly $4B revenues, which almost doubled in 2011, are from advertising. So understanding advertising is critical to knowing why you want to buy, and hold, Facebook.
Facebook has 28% of the on-line display ad market, but only 5% of all on-line advertising. On-line advertising itself is generally predicted to grow at 16%/year. But there is a tremendous case to be made that the market will grow a whole lot faster, and Facebook's share will become a whole lot larger.
At the end of January Proctor & Gamble's stock took a hit as earnings missed expectations, and the CEO projected a tough year going forward. He announced 1,600 layoffs, many in marketing, as he admitted the ad budget was going to be "moderated" – code for cut. While advertising had grown at 24%/year sales were only growing at 6%. He then admitted that the "efficiency" of on-line advertising was demonstrating the ability to be much higher than traditional advertising. In other words, he is planning to cut traditional marketing and advertising, such as coupon printing and ads in newspapers and television, and spend more on-line.
P&G spends about $10B/year on advertising. 2.5x the Facebook revenue. Now, imagine if P&G moves 10% – or 25% – of its advertising from television (which is now a $250B market) on-line. That is $1-$2.5B per year, from just one company! Such a "marginal" move, by just one company, adds 1-3% to the total on-line market. Now, magnify that across Unilever, Danon, Kimberly-Clark, Colgate, Avon, Coke, Pepsi …… the 200 or 300 largest advertisers and it becomes a REALLY BIG number.
The trend is clear. People spend less time watching TV and reading newspapers. We all interact with information and entertainment more and more on computers and mobile devices. Ad declines have already killed newspapers, and television is on the precipice of following its print brethren. The market shift toward advertising on-line will continue, and the trend is bound to accelerate.
Last year P&G launched an on-line marketing program for Old Spice. The CEO singled out the 1.8 billion free impressions that received on-line. When the CEO of one of the world's largest advertisers takes note, and says he's going to move that way, you can bet everyone is going to head that direction. Especially as they recognize the poor "efficiency" of traditional media spending.
And don't forget the thousands of small businesses that have much smaller budgets. Most of them rarely, or never, could afford traditional media. On-line is not only more effective, but far cheaper. Especially as mobile devices makes local marketing even more targeted and effective. So as big companies shift to on-line we can expect small to medium sized businesses to shift as well, and new advertisers are being created which will expand the market even further. This trend could lead to a much faster organic market growth rate beyond 16% – perhaps 25% or even more!
Which brings us back to Facebook, which will be the primary beneficiary of this market shift.
Facebook is rapidly catching up with Google in the referral business. 850 million users is important, because it shows the ability Facebook has to bring people on-line, keep them on-line and then refer them somewhere. The kind of thing that made Google famous, big and valuable with search a decade ago. In fact, people spend much more time on Facebook than they do Google. When advertisers want to reach their audience they go where the people are (and are being referred) and that is Facebook. Nobody else is even close.
The good thing about having a big user base, and one that shares information, is the ability to gather data. Just like Google kept all those billions of searches to analyze and share data, increasingly Facebook is able to do the same. Facebook will be able to tell advertisers how people interact, how they move between pages, what keeps them on a page and what leads to buying behavior. Facebook uses this data to help users be more effective, just like Google does to help us do great searches. But in the future Facebook can package and sell this data to advertisers, helping them be more effective, and they can use it for selling, and placing, ads.
Facebook usage is dominant in social media, but becoming more dominant in all internet use. Like how Windows became the dominant platform for PC users, Facebook is well on its way to being the platform for how we use the web. Email will be less necessary as we communicate across Facebook with those we really want to know. Information on topics of interest will stream to us through Facebook because we select them, or our friends refer them. Solving problems will use referrals more, and searching less. The platform will help us be much more efficient at using the internet, and that reinforces more usage and more users. All the while attracting more advertisers.
The big losers will be traditional media. We may watch sports live, but increasingly we'll be unwilling to watch streaming TV as the networks trained boomers. Companies like NBC will suffer just as newspaper giants such as Tribune Corp., New York Times and Dow Jones. Ad agencies will have a very tough time, as ad budgets drop their placement fees will decline concomittantly. Lavish spending on big budget ads will also decline.
Anyone in on-line advertising is likely to be a winner initially. Linked-in, Twitter, Pinterest and Google will all benefit from the market shift. But the biggest winner of all will be Facebook.
What if the on-line ad market grows 25%/year (think not possible? look at how fast the smartphone and tablet markets have grown while PC sales have stagnated last 2 years as that market shifted. And don't forget that incremental amount could easily happen just by the top 50 CPG companies moving 10% of their budget!)? That adds $20-$25B incrementally. If Facebook's share shifts from 5% to 10% that would add $2-2.5B to Facebook first year; more than 50%!
Blow those numbers up just a bit more. Say double on-line advertising and give Facebook 20% share as people drop email and traditional search for Facebook – plus mobile device use continues escalating. Facebook revenues could double up, or more, for several years as trends obsolete newspapers, magazines, televisions, radios, PCs and traditional thoughts about advertising.
If you missed out on AT&T in the 1950s, IBM in the 1960s, Microsoft in 1980, or Apple in 2000, don't miss this one. Forget about all those spreadsheets and short-term analyst forecasts and buy the trend. Buy Facebook.
