Facebook's growing market opportunity

In March we introduced the Polen Capital Global Growth Fund to Australian investors. The Boca Raton-based manager Polen Capital was established in 1979 and over the past 32 years the flagship US Portfolio has been able to compound earnings growth above 15 per cent annually versus approximately six per cent annually for the S&P 500.

For this series of articles, I asked the team at Polen to describe each of the companies currently in the portfolio, today we look at global social media and advertising giant Facebook.

Facebook Inc. (NASDAQ:FB)

California-based Facebook’s value proposition is providing services that allow people to connect, rendering it largely a media company.

Approximately, two thirds of internet-connected people outside China use Core Facebook at least monthly, and about two thirds of Facebook’s monthly users visit daily. The average user spends greater than 40 minutes per day on the Facebook platform, which is more than the average person spends exercising or caring for their pets.

In the US alone, Core Facebook offers marketers a larger audience every day of the year than the Super Bowl offers once per year. People use Core Facebook for real life communication such as the birth of a baby, joining a movement such as #metoo, communicating with politicians and joining an interest-based group.

Instagram, a platform owned by Facebook is used for more creative expression through photos and videos and has allowed Facebook to attract more influencers and brands. Time use is shifting from Core Facebook to Instagram, but engagement on the Core Facebook app has been stable.

Considering the high percentage of internet-connected people that use social media regularly in all corners of the world, despite the negative headlines, social media as a form of entertainment is here to stay.

Within social media, Facebook has virtually no competition today. Twitter’s real-time news angle is more niche and Instagram fast-followed Snapchat’s Stories and ephemeral content to cut off its growth.

Deeply embedded network effects and the fact that a new entrant must convince new users to download an app that (initially at least) has little activity and then keep using this app while it still has little activity for at least several months creates significant barriers to entry.

Facebook’s other competitive advantages include its data advantage for marketers, its scale, and the ability to spend more in areas such as data centers, security and regulation, as well as its relationships with millions of marketers who can take years to become comfortable with a new platform and its returns on investment (ROIs).

Facebook’s market opportunity is the US$700 billion global advertising market. Within this total addressable market, digital advertising represents approximately 40 per cent and is growing as people spend more than 40 per cent of their media time on the internet.

The number of active marketers continues to grow because digital marketing has democratised advertising by allowing companies of any size with any budget to gain access to targeted advertising.

With over US$60 billion in annual ad revenue and millions of active marketers, Facebook has a market share higher than 20 per cent and growing.

Regulation limiting data targeting could shrink the pie, but it should not hurt Facebook’s relative advantage versus competitors since the regulation would likely be applied to all competitors evenly (you could say regulation also increases barriers to entry).

Facebook currently benefits from single-digit user growth, all of which is coming from developing markets. Facebook however should generate long-term double-digit revenue growth from improved ads leading to higher like-for-like ad prices over time, higher priced formats such as video/stories taking share, and the monetisation of platforms/products such as WhatsApp and Instagram Commerce.

Although operating margins will likely decline to the high-30s due to heavy capex investments hitting the income statement, and increased security investment, management expects to achieve a better balance of revenue growth and profitability going forward.

Beyond these investments and given the high fixed cost structure of the business, Polen Capital believe Facebook’s margins should eventually improve and allow it to be a long-term mid-teens earnings per share grower beginning this year.

If you would like to learn more about the Polen Capital Global Growth Fund, visit the fund’s web page:

The Polen Capital Global Growth Fund owns shares in Facebook. This article was prepared 09 July 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Facebook you should seek financial advice.


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