Facebook Proves Big Tech’s Scale Reigns Supreme
There is no way around it. Platforms rule. Big technology firms are using their scale to effortlessly enter new markets and build new businesses.
Just take a look at what happened on Tuesday: Facebook (NASDAQ: FB, Rated “C+”) announced Shops, an e-commerce objective that brings live stream and Instagram shopping to the social media platform. It happened with a flick of a virtual switch.
I believe that scale is the reason big tech is cheap, even now. And I’m aware that idea is a very hard sell.
There are a hundred stories detailing why Facebook shares are overpriced. Relatively scant enterprise value coupled with regulatory threats all over the globe can be a persuasive argument. The fact Facebook shares trade at 8.2 times sales is the capper, or so the theory goes.
Most bearish arguments, however, miss the real story. Facebook is valuable because it is genuinely popular and can’t be easily duplicated.
The San Francisco company, like it or not, is engrained in social consciousness. Patrons use it because it is where friends and family live online. Leaving the community makes keeping in touch in a digital world untenable.
Through the first quarter of 2020, Statista reports that 2.6 billion members login at least once a month. That figure jumps to 3 billion with the addition of core units like WhatsApp, Instagram and Facebook Messenger.
Shop now provides those same users a way to easily setup free online storefronts.
In an economy ravaged by the global pandemic and lockdowns, the timing could not be better. Some one-third of small businesses do not plan to reopen, and 55% will not rehire the same workers, according to a report at CNBC.
E-commerce has been one of the few bright spots. From Amazon.com (NASDAQ: AMZN, Rated “C+”), to online craft shop Etsy (NASDAQ: ETSY, Rated “C”) to Walmart (NYSE: WMT, Rated “B”), digital sales are booming. Facebook is using its vast online community to build a new business segment almost out of thin air.
While the company will store its users’ payment credentials to help with portability, the heavy lifting on the backend is being done by partners like Shopify (NYSE: SHOP, Rated “D+”). This means Facebook members will get the best tools to run and manage an online business while staying in touch with customers using Instagram, WhatsApp and Facebook Messenger.
Facebook gets the potential to sell targeted ads against millions of new virtual storefronts, and fee if patrons use its checkout option.
It’s not hard to see the massive potential of this new business. It’s the product of scale as few companies are capable of easily entering new markets.
Coincidentally, Shops was announced on the same day Walmart disclosed it was shuttering Jet.com, an e-commerce business acquired in 2016 for $3 billion. Officially, Walmart managers claim that Jet.com served its purpose, helping build a an omnichannel, a unified online and real-world shopping experience. That’s generous.
In reality, the Arkansas retail behemoth moved last year to solidify its physical storefronts with curbside delivery, according to the Wall Street Journal. Its Supercenter strategy ultimately killed Jet.com, but not before the online store burnt through another $2 billion in cash.
If Walmart can’t get it done, you can only imagine where that leaves the rest of the legacy world.
The shares of big tech companies like Facebook, Amazon.com and Microsoft (NASDAQ: MSFT, Rated “A-”) are making new highs because the underlying platforms make moving into new businesses easier. It also doesn’t hurt to have an army of the most skilled engineers to fill in the holes.
These stocks have had wonderful runs. Since the beginning of 2019, Facebook, Amazon.com and Microsoft are up 65%, 63% and 84%, respectively. It’s easy to argue shares are overpriced using financial metrics like trailing earnings and sales. Ratios miss the point.
These are stories about scale and business opportunities.
While the stocks may pullback in the near term, use weaknesses as buying opportunities. Just like you as an investor, these companies are only getting started on their journey.
Jon D. Markman