Facebook Is The Digital Singularity
There have been many recent headwinds for Facebook (FB) in regards to government punitive and regulatory intervention, public concerns over Facebook's privacy and content activities, and uncertain financials with increasing operations and investment costs. However, despite these I believe the company is likely to continue to see moderate and healthy growth in the short and medium-term.
As big one-time costs fade and investments into new services on the Facebook platform, as well as its associated brands such as WhatsApp and Instagram, begin bolstering further user activity (and even become revenue segments themselves), I believe the company's earnings and margins trajectory will make a positive turnaround.
Facebook has centered and planted itself firmly as a gravitational nexus for Internet services and social media. Once Facebook gets back on its feet, it is likely to begin to continue to delve into the still significant remaining areas of growth left open to it.
Facebook As A Natural Monopoly
A natural monopoly is a theorized situation where a monopoly in a sector ends up providing the cheapest and best products and services and, therefore, is the natural trend within an industry. The natural monopoly may be able to best utilize economies of scale, large investments, wide supply, and distribution chains, broad networks, critical mass, and overcome high barriers to entry.
Facebook appears to come close to a natural monopoly in that for the purposes of concerted connection and interaction with friends and utilizing broader group organizing functions, it is better to have as large a population as possible with as many options on a platform as possible.
Other social networks throughout the years, often backed by serious contenders, have tried to take on Facebook and failed. Their names include Google+, MySpace, and more. Some, such as WhatsApp and Instagram, are now part of Facebook itself (to the FTC's and DOJ's concern).
While many social platforms have carved out their own niche space for online interaction and connection, Facebook remains anchored with a strong network effect in the primary social media space of person-to-person connection, organizing, communication, and exchange.
Facebook Just Keeps Growing Its Platform
This "singularity" that Facebook has created and keeps on building upon--through mechanisms such as Facebook Watch, Marketplace, News, and more--is what makes Facebook likely to continue to keep the ground it has gained and continue to pull in growth from its past core advertising services but also from these new sources of revitalization and revenue.
For example, Facebook Watch was initially criticized for viewer metrics that made it seem like people were only watching videos for a few seconds and overall looking like a content investment dump with little revenue gain. However, now several years later, not only is Facebook Watch driving immense user activity on the site, with 140 million daily users of the service but is even testing out subscription options in a fashion that entire other companies are built on.
Other services, such as Facebook News and Marketplace, and even Facebook's upcoming potential Libra cryptocurrency, pose a similar value proposition by being potential segment streams in themselves as well as representing a strengthening in the Facebook platform's stickiness and usage.
The Long Run Still Looks Good For Facebook
We see the continuing results of these investments into new Facebook products and services. Even at Facebook's massive current size, with about a third of the world active every month on the platform, in Q2 2019, Facebook still posted 8% year-on-year growth in daily active users and monthly active users to 1.59 billion and 2.41 billion, respectively.
At the moment, the company's price-to-earnings ratio is difficult to estimate due to a combination of the Altera Corp. ruling by the U.S. Court of Appeals for the Ninth Circuit concerning the taxation of share-based compensation expense and the Federal Trade Commission's fines and charges.
Furthermore, the company's operating expenses seem to be on a sustained rise at the moment due to primarily increased regulatory and public oversight on functional areas ranging from privacy to content moderation. This has resulted in reduced margins and contributed to lesser operating income for the moment, and the long-term impact of the decrease is unclear.
However, based on current trends, we can easily see the company's long-term path is still for moderate growth. The company invested a record $13.915 billion in capital investments, which are likely to play a role in stabilizing Facebook's privacy and content risks as well as increasing support to the growing array of services on the platform.
In the medium term, we can then expect the margin reduction of recent events to decrease as the company begins to move past the immediate impact of regulatory and public spotlight on the company's mishaps. As time goes on, the continuing benefit of the spectrum of new services on the platform will continue to make their impact on user activity and the top and bottom lines too, creating an overall expectation of healthy growth for Facebook.
Conclusion
Facebook has had a tumultuous past two years in terms of the chickens coming home to roost on aspects of its platform--many of which are worthy of public examination--and the financial impacts and risks of such. Despite this, Facebook has weathered through and still retains significant growth potential, as it is showing that even at its current massive size it can grow users, user activity, revenue streams, and services offered.
I believe Facebook remains well-placed to continue a moderate expansion trajectory over the medium term as recent negative financial impacts from capital investments and regulatory compliance fade away and the positive results from those investments begin to become apparent.
Facebook has dug deep into the modern Internet services economy. It is this deep entrenchment that makes it likely to continue to profit, as our world continues to drive toward increased online and digital connection, communication, activity, and existence.
Disclaimer: These are only my opinions and do not constitute investment advice.