When it comes to Facebook (NASDAQ:FB), don’t confuse the core Facebook platform with the company or with Facebook stock.
The core Facebook platform is the world’s most widely used social media app with over 2 billion monthly active users. That platform, despite its size, is struggling right now. Consumers look at Facebook as “old” and are spending more time on other social media apps. Plus, consumers have some lingering concerns about the privacy and data protection capabilities of the core Facebook platform. Indeed, a recent Pew survey found that about a quarter of U.S. adults have deleted the FB app from their phones
But the Facebook platform is not the same as Facebook the company or Facebook stock.
The company is an ecosystem that consists of four of the most widely used social media apps in the world. Only one of them, Facebook, is losing momentum. The other three are either becoming much more popular or maintaining sky-high user metrics.
Meanwhile, Facebook stock is a reflection of the company, not Facebook the platform. Since 2013, the Facebook platform has been becoming less popular among younger consumers. Yet since then, Facebook stock has increased by nearly 500%. That’s because worries about the Facebook platform were overdone, while the number of users on Instagram, another platform owned by the company, increased to 1 billion users from 100 million users.
Long story short, don’t confuse Facebook stock with the Facebook platform. And don’t read too much into the so-called demise of the Facebook platform. The Facebook platform isn’t dying en masse, and even if it were, Facebook’s other assets – Instagram, Messenger, and WhatsApp – are lucrative enough by themselves to cause Facebook stock to rise above its current levels.
As a result, investors should buy Facebook stock on its current weakness and hold onto it for a long time.
The Facebook Platform Isn’t Dying
Claims regarding the death of the Facebook platform are greatly overdone.
A recent Pew survey, conducted after the Cambridge Analytica scandal, found that 26% of U.S. adults have deleted the FB app. That same survey found that 42% of U.S. adults have taken a break from the social media site.
On their face, those numbers look bad. If 26% of U.S. adults actually did delete the Facebook app and have stopped using the platform entirely, that would mean that Facebook had lost 65 million users, assuming every adult in the U.S. has a Facebook account.
But there are two important things to point out here:
People have been saying Facebook has been dying for five years. They’ve been wrong. 65 million users is a drop in the ocean for Facebook.
The so-called demise of FB is not a new narrative. It has been around for the past five years (see 2013, 2014, 2015, 2016, and 2017). Yet during that stretch, Facebook has more than doubled its worldwide monthly active user base from 1 billion to over 2 billion.
I’m not saying that the pundits are completely wrong about the Facebook platform losing its relevance. It is losing relevance. That much is obvious. People aren’t posting as much anymore, and engagement is way, way down. The kids have moved onto Instagram and Snap’s (NYSE:SNAP) Snapchat. The adults are upset about Facebook’s privacy issues.
But what I am saying is that all of that doesn’t matter. FB isn’t really a social network platform anymore. It is an internet utility that has become your internet ID. You use it to look up people, get phone numbers, receive birthday reminders, set up events, and get information about other people. From this perspective, even though Facebook’s engagement is dropping, FB isn’t dying. It is simply becoming less valuable than it was before.
Moreover, even if 65 million U.S. adults did delete their Facebook accounts, that would represent only 3% of Facebook’s 2.2 billion user base, assuming all 65 million were active users. Thus, even in a worst-case scenario, 65 million users is still just a drop in the ocean for FB.
Facebook Stock Is Much More Than Facebook
The bull thesis on Facebook stock has less to do with Facebook not dying and more to do with the company’s other platforms ramping.
Outside of China, there are five apps with more than one billion users in the world. Facebook owns four of these apps. The fifth one is YouTube, which is owned by Alphabet (NASDAQ:GOOG,NASDAQ: GOOGL).
Let’s just assume that Facebook is gradually dying, and that its 2.2 billion user base withers down to 1 billion over the next five years. Where are all those users going? Right now, they are all going to Instagram, a platform which is adding hundreds of millions of users every year. Thus, if Facebook’s user base drops by 1 billion over the next five years, Instagram’s user base will likely rise by 1 billion.
In other words, while users may be leaving the Facebook app, they aren’t leaving the Facebook ecosystem.
Meanwhile, the popularity of communication apps doesn’t really ebb and flow. The apps simply grow as more people talk to each other over the Internet. As a result, the user bases of Instagram and WhatsApp will probably gradually increase over the next several years.
In summary, even if engagement on the Facebook platform drops and users leave the platform, Facebook the company isn’t doomed. All of the users who will have left Facebook will likely have migrated to the company’s other apps, meaning that the Facebook ecosystem will remain strong.
The Bottom Line on FB Stock
Facebook stock has been a falling knife, and with good reason. The company’s fundamentals are weakening due to declining engagement on the Facebook platform.
But Facebook stock is much more than the Facebook app. And, if you consider the whole company, Facebook stock looks woefully undervalued at $160. The two big risks here are that Instagram dies, too, and/or digital advertising stops growing.
I don’t think there is a more than 5% chance of either of those risks materializing. As a result, buying Facebook stock on this dip looks like the smart move for long-term investors.
As of this writing, Luke Lango was long FB and GOOG.
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