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Facebook (FB) Stock | NASDAQ: FB

Driving the Digital Economy

Facebook, Inc. (“Facebook”) is an online social media company and conglomerate that operates Facebook, Instagram, WhatsApp, Messenger, and Facebook Reality Labs. What began as a social networking company connecting Harvard students together in an online setting is now a trillion-dollar behemoth company growing not only in social media, but also in ecommerce, advertising, virtual and augmented reality (“VR” and “AR”), and messaging. 

Facebook prides itself as a company that is working every day to bring people closer together and create a new tomorrow that is in line with this vision. It is not afraid to make bold moves – while the internet transformed the world in the last few decades, Facebook is now investing billions of dollars to extend the internet to the metaverse, a new virtual world that will change the way we socialize, conduct commerce, and view reality.


Adrian Iwanicki

Equity Analyst






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Where Are We Now

Updated on: 11/7/2021

Conviction Score


Facebook is more than the “blue app” – it is an advertising business that hosts a multi-billion people network across Facebook, Messenger, Instagram, WhatsApp, and Oculus. While businesses and creators make money from advertising and selling on these platforms, Facebook is also looking to expand its horizons through Facebook Reality Labs.

  • Mark Zuckerberg is all in on the metaverse – a virtual universe he and Facebook believe will be the next major computing platform. Facebook is committing $10 billion a year and counting on investments in the metaverse. Because these investments are speculative as of today, we think the recent sell-off was warranted as investors figure out where Facebook / Meta is headed.

  • The core business is still doing exceptionally well despite Apple’s ad targeting privacy changes in the iOS 14 update. Facebook still reported 35% revenue growth as average global revenue per user remained around $10 and monthly active users hit a new high (above 2.9 billion).

Investment Thesis

  1. Facebook’s network of top-ranked social media networks, Facebook and Instagram, possesses deep network effects that benefit individuals, businesses, and creators alike. These three groups of users interact with each other, driving engagement that facilitates effective advertising campaigns and favourable business outcomes. Facebook is the ultimate beneficiary, who gushes cash from operations that are so lean, the company does not need to seek debt.

  2. Facebook’s core advertising business makes up almost all of the business’ financials and is so strong, it can probably single handedly drive impressive growth at the company for many years. Shifting ad spend to digital forms and a naturally growing user base, as well as growth due to ecommerce and creator efforts, are catalysts that should catapult Facebook to new highs.

  3. Facebook’s investments in the creator economy and ecommerce are a bet on the new way of doing business and a way to exercise optionality within its own platform. Users want more convenient ways of purchasing products they see on content shared on Facebook and Instagram, and Facebook is making this a reality.

  4. The metaverse is a new wave of computing that Facebook believes will be the next major computing platform after mobile. If Facebook emerges as the first mover and leader of the metaverse, it can unlock an unimaginably massive total addressable market that would dwarf the company’s current growth rates.

The Basics

To this day, advertising drives almost all revenue at Facebook. Facebook’s product portfolio includes the following media:

  • Facebook

  • WhatsApp

  • Messenger

  • Instagram

  • Facebook Reality Labs

Facebook Products

Facebook – a social media platform used to connect, share, discover, and communicate with friends and family via mobile or desktop. Facebook contains several engaging features, such as Facebook News Feed, Stories, Groups, Shops, Marketplace, News, and Watch.

WhatsApp – a secure messaging app with end-to-end encryption used by people and businesses to communicate and conduct business via text or voice at no cost.

Messenger – a free messaging app that is also used by people and businesses to communicate with others. Unlike WhatsApp, Messenger is connected to Facebook and hosts Messenger Rooms, a video chat room with the capability to handle up to 50 people at once.

Instagram – a modern social media platform where individuals, creators, and businesses share photos and videos with the world. Instagram contains Instagram Feed, Stories, Reels, IGTV, Live, Shops, and messaging to facilitate communication and engagement with friends, family, businesses, creators, and celebrities.

Facebook Reality Labs – Facebook’s augmented reality and virtual reality arm that builds and develops Oculus Quest, VR stack of hardware, software, and content that allow people to play games and immerse themselves in VR experiences, and Portal, a suite of TV and tablet-like hardware that enable smart video calling, Story Time, and AR experiences to communicate with friends and family.

Facebook leverages its product portfolio to generate revenues from selling advertising placements to marketers. Marketers (i.e., businesses, creators, artists, etc.) purchase ad space across Facebook, Instagram, Messenger, and other third-party apps and websites to reach relevant audiences based on age, gender, location, interests, and users’ online behaviours. 

Facebook’s ad products are paid for directly or via advertising agencies and resellers, typically based on the number of impressions delivered or number of clicks performed by users on ads shown throughout the Facebook universe. 

Ad revenue makes up a significant portion of Facebook’s revenues – and continues to grow at rapid rates. The company, despite its size, mirrors the growth profile of new, hot tech companies in emerging industries with its ad business.

Other revenues, which mainly include hardware sales of Oculus and Portal products and fees received from Payments, faced growth near zero between 2011 and 2017. Since then, Oculus sales and the new Oculus Quest 2 product introduced in October 2020 contributed to a rising trend that is showing no signs of slowing.

Facebook Revenue by Segment ($M) (Q3 2021)

Source: Facebook Investor Relations

Facebook’s high market cap appears to have no bearing on its rate of growth. Although the social media giant surpassed $500 billion in market cap in July 2017, Facebook is still on a tear when it comes to making money.

As Facebook continues to defy the law of large numbers, its revenue growth is supported by high operating and net profit margins. The business gushes cash and holds almost no debt, and this is precisely what allows it to continue growing at gravity-defying rates from a financial perspective. As long as new verticals are explored, optionality is exercised, and these endeavours ultimately become profitable, we see no signs of this trend abating.

The House of Zuck

Facebook launched in February 2004 as “Thefacebook” by Mark Zuckerberg, a then-student at Harvard and the current CEO, as well as Dustin Moskovitz, Eduardo Saverin, and Chris Hughes. Almost immediately, Thefacebook took off as 50% of Harvard students registered by the end of the first month of operating.

Registrants were able to upload photos of themselves and interact with other classmates. The demand for this sort of service was supposedly massive, and its popularity spread quickly to other schools, like Yale and Stanford.

Within a few months, there were 250,000 users across over 30 schools – and the rest is history. Growth of Thefacebook’s user base was astonishing, growing to six million users in 2005, the same year the service was opened to high school and university students, Thefacebook became simply “Facebook”, and photo tagging was introduced. One year later, anyone over the age of 13 was able to register on Facebook.

As the user base continued to swell beyond the sky’s limits, advertisers and marketers began to dip their toes into the nascent world of social media advertising. In 2007, Facebook officially launched Facebook Ads with an aim to allow advertisers to deliver specific, targeted ads to users. Five years later, Facebook launched its mobile ads program and tried to make ads as discreet as possible amid consumer concerns that these ads would take up too much space on the mobile app.

Early that same year, Facebook filed its initial public offering and raised $16 billion in May of 2012 when it officially became a public company. 

Competitive Advantages

Network Effects

A user of Facebook’s social networks benefits from the billions of users that interact with Facebook products on a daily basis. Facebook and Instagram have become part of our regular routines where we post about ourselves and our ideas, check in with friends and family, stay up to date with the news and the hottest trends, and connect with people thousands of miles away.

As these networks swell, Facebook’s networks benefit individuals and businesses alike in the following ways:

  • More users mean more compelling content is posted across Facebook platforms on a more frequent basis for users to consume.

  • As more compelling content is consumed, the greater the time spent per day by each user, which feeds Facebook’s ever-improving data algorithms to suggest even more relevant content, as well as relevant ads based on a user’s unique behaviour, ultimately driving better engagement.

  • Marketers are attracted to platforms with active engagement – areas or media where users or consumers would notice an ad, consciously or subconsciously process the information on it, and finally make a purchase decision on it.

Although still in its infancy, Oculus will experience network effects to a similar degree. Facebook is offering VR hardware to the retail consumer at affordable prices, and they expect to keep it that way. Oculus is effectively a “razor and blades” model – Facebook’s goal with Oculus is to get the hardware into as many hands as possible around the world, after which the digital economy inside of the hardware will compound at astounding rates. After all, Facebook knows what it takes to host a multi-billion-user network – it has done so once, and it will do it again.

Financial Powerhouse

Facebook effectively self-finances its own growth investments. The company gushes so much cash that it hardly relies on public equity and debt markets to raise capital to grow.

Facebook has zero debt on its balance sheet if we were to exclude operating lease obligations. Facebook’s only “debt” would be its operating lease obligations, which we believe should be considered debt based on the substance and form of these lease payments mimicking traditional debt payments. The company has a net cash position, which means the value of Facebook’s cash, cash equivalents, and short-term investments is greater than current and long-term debt and lease obligations.

Facebook is still growing revenues at rapid rates, meaning the company is far from maturity despite its market cap hovering around the $1 trillion mark. A net cash position implies there is significant room to reinvest idle cash into new opportunities, and Facebook can also issue debt to finance much larger projects should the need arise. In the absence of growth opportunities, Facebook can buy back large amounts of stock or make its operations more efficient.

All in all, Facebook shareholders can rest assured that the company is ready for any new competitors, products, or economic and political environments that may threaten Facebook, as long as its balance sheet remains this robust.

Invest, Invest, Invest

Facebook’s impenetrable network effects, bulletproof balance sheet, and self-financing profile enable it to explore monetization opportunities within its current network and in new verticals.

Facebook’s daily active user (“DAU”) base sits just under 2 billion people and counting. The strength of Facebook’s core social media and ad business allows Facebook to be very active within the blue app and Instagram by expanding its services and ultimately, user engagement. It appears some of these services have been around forever, but many launched only recently and with little initial interest. For example:

  • Facebook Marketplace was introduced in 2016

  • Facebook Stories was launched in 2017

  • Facebook Watch was launched in 2018

  • Facebook Shops and Instagram Reels were launched in 2020

Facebook can dive headfirst into any emerging trend and spend billions of dollars in doing this to upkeep its ~2 billion DAU base. Today, Facebook is dialled in on video, which now accounts for almost half of all time spent on Facebook. Reels is also the largest current contributor to Instagram’s engagement growth and Facebook Watch is growing faster than any other form of content found in Facebook’s News Feed. Ecommerce and the creator economy are two other major trends with seemingly unlimited growth opportunities that deserve a separate section and discussion later in this report (see “Creator Economy”).

On the acquisitions front, Facebook has made a few monumental purchases that initially looked extremely expensive and attracted investor criticism:

  • Instagram was purchased in 2012 for $1 billion when it had only 50 million monthly active users (“MAU[s]”).

  • WhatsApp was purchased in 2014 for $19 billion even though it was valued at $1.5 billion in private markets merely a year prior.

  • Oculus was purchased in 2014 for $2 billion to control VR products that were largely unheard of and had little use in our daily lives.

We know today that these investments have paid off handsomely – Instagram and WhatsApp host about 1 billion and 2 billion MAUs, respectively, and Oculus sales are taking off.

Facebook and Instagram are now places where people and organizations not only interact for pleasure, but also for business and content consumption. The number of potential use cases presented within Facebook and Instagram are sprouting in all directions right in front of our eyes, and Facebook is investing accordingly.

Facebook has been increasing its capital, acquisition, and research & development investments to enhance its moat. These investments have also been the key to Facebook's success and there is more coming. “Skin in the game” would be an understatement – Facebook is “all in” on growth.

Facebook Investments ($M) (Q3 2021)

The Core Ad Freight Train

In its current state, Facebook is an advertising company in virtually all respects. Although its products are still mainly used for online social interaction and the company is venturing into many exciting new fields, almost 100% of revenues are derived from advertising.

Facebook Monthly Active Users (MAUs) per Quarter (in Millions)

Source: Meta Investor Relations

Absent any novel expansion opportunities, the core advertising business is an indestructible freight train that is plowing through any obstacle in its path. Despite anecdotal claims that the global Facebook user count is falling off a cliff, it is quite the opposite – MAUs are chugging along from each quarter to the next with modest growth from North America and more significant growth from areas outside of North America and Europe.

Adding fuel to the fire is the ever-growing average revenue per user ("ARPU"). The increasing monetization of users is an incredibly powerful effect that should help Facebook (specifically the blue app) withstand regulatory and IDFA concerns (see "Risks").

Facebook Worldwide ARPU ($ / MAU) (Q3 2021)

Source: Facebook Investor Relations

More users on Facebook attract more eyeballs; more eyeballs drive more data and engagement; more data and engagement mean ads are more effective; finally, more effective ads mean marketers cannot get enough of Facebook.

Facebook’s global cost per 1,000 impressions (“CPM[s]”) is experiencing a rising trend, recently surpassing $4 again after a run-up to almost $5 in December 2020. Considering the average CPM prior to the pandemic was approximately $2.50, we believe these figures are reflecting ad budgets shifting to digital media, such as Facebook, at increasing rates.

Facebook, Instagram Global CPMsSource: datastudio.google.com

We believe Facebook owns some of the most attractive platforms for advertisers to use, and the following non-exhaustive list of statistics and other information explains why:

  • Two-thirds (67%) of user interactions on social media websites and apps influence their buying decisions

  • Facebook is the most effective social media tool for advertisers according to The Manifest, who has found that consumers are most likely to make a purchase from a brand they follow on Facebook.

  • Facebook’s algorithms are so effective in targeting audiences that some marketers have seen their customer acquisition costs drop by over 70%.

  • Over 70% of people use Facebook for non-personal reasons (i.e., business and content).

  • CPMs are significantly cheaper on Facebook versus traditional advertising forms, such as TV, radio, or direct mail, which can cost well over $50 per 1,000 impressions.

  • Advertising on Facebook and Instagram have low barriers to entry, allowing even the smallest business to grow its reach and audience.

  • Once again, there are billions of daily users who feed and improve Facebook’s collection of data, targeting algorithms, and ad effectiveness, traits that almost no other website, app, or medium has today.

Facebook Survey on Social Media

The growing user bases of Facebook and Instagram in unison with ad budgets increasingly shifting to digital media provide enough “firepower” for Facebook to continue growing at above-average rates. However, Facebook is now investing in the future of ecommerce and advertising that will pose even greater returns on advertising spend for marketers.

Facebook recently introduced Live Breaks (i.e., in-stream video ads) and Instagram Reels Ads. Consumers of Facebook and Instagram videos will see ads of up to 30 seconds in duration, which allows content creators to earn money and marketers to get their message out to the vastly growing base of video viewers. As mentioned before, video makes up over half of all time spent on Facebook and Reels is the largest contributor to Instagram’s engagement growth.

Finally, Facebook’s push to become an ecommerce giant by rolling out Instagram Shopping / Checkout (Checkout is currently only available in the US), Facebook Shops, and Facebook Marketplace will mean that advertisers convert ad viewers to purchasers more frequently, and they will also have more direct insight into the effectiveness of their Facebook and Instagram ads if shoppers do not have to leave the Facebook ecosystem to complete their purchases. We believe this will be a compelling value proposition that will drive ad spend higher on Facebook’s platforms for years on end.

Ecommerce and the Creator Economy

What started out as a social media platform may eventually become one of the largest ecommerce platforms on the planet, whereby Facebook and Instagram would join the ranks of Amazon, Alibaba, and eBay. Facebook is looking to create a full ecommerce stack that begins with its world-class advertising tools and ends with payments. This should theoretically eliminate the inconvenience of landing on non-personalized external web pages after a consumer makes a purchasing decision following an interaction with a business, organization, influencer, content creator, or an artist on Instagram or Facebook.

The effects of a full ecommerce stack within Facebook platforms are profound – consumers all over the world will eventually be able to purchase products right off Facebook Marketplace and Shops with Facebook Pay and off Instagram with Instagram Checkout within seconds and without ever leaving the Facebook ecosystem.

More users will be converted to more purchasers, more purchasers will attract more businesses and product selection, which will then come full circle to attract more consumers where they can view content and interact with brands they love for fashion inspiration, product tips, and much more, before clicking the “buy” button.

Instagram Checkout UISource: The Verge

Similarly, content creators will be able to leverage Facebook and Instagram to earn a living for the content. The idea behind Facebook’s investments in Live Breaks, Live Shopping, Live Audio Rooms (a live audio event service), podcasts, and Bulletin (a publishing and subscription services for writers) and keeping these content creation tools free until 2023 is to foster an environment in which creators can earn a living, develop better and more frequent content, and drive user engagement on Facebook platforms. 

If Facebook makes its platforms the media of choice for millions of content creators and marketers around the world, it will ignite deeper network effects than the platforms already facilitate today. We believe Facebook’s efforts to drive business engagement via ecommerce and enable content creators to earn a living play into the same goal – get more people into the Facebook ecosystem. Facebook’s platforms will eventually be much more than social media – in fact, we may not even consider Facebook and Instagram “social media” as we know it today within the next 5 to 10 years.

Oculus and the Metaverse

In Facebook’s Q2 2021 earnings call, Zuckerberg communicated his expectation that people “will transition from seeing [Facebook] primarily as a social media company to seeing [Facebook] as a metaverse company”.

Despite the smartphone holding the throne as the dominant computing platform in our daily lives, Facebook believes the metaverse will be the new internet and AR / VR will be the next major computing platform.

The metaverse can be thought of as a form of computing that blurs the line between reality and the virtual world. While today we “log on” to the internet to perform a search, send an email, or buy a product, the metaverse will be an “always-on” and ever-expanding environment where people can interact with each other, play games, work, and create things. What would differentiate the metaverse from the internet as we know it is the feeling that you are in the presence of other people and places a world away even though you could be sitting in your own living room.

Facebook sees the metaverse as the “ultimate expression of social technology”. The metaverse would not necessarily be a new form of social interaction, internet, or social media, but rather an extension of these things.

Oculus and the metaverse is meant to be affordable to as many people as possible to drive adoption. Once people are on the platform, the ecosystem can be built effectively for its intended purpose of serving many new verticals.

We believe Facebook, as one of the largest companies in the world, and one that is also dedicating substantial investments towards this realm, will emerge as a powerful first mover, leader, and conqueror of the metaverse one day. Some of the astronomical opportunities hosting the metaverse would be:

Facebook Oculus In ActionSource: Oculus
  • AR / VR advertising and consumer use cases, including viewing real estate, products (namely apparel, beauty, and furniture);

  • AR / VR gaming, which already exists, but are not as immersive and of the quality that the future holds;

  • New social experiences with friends and family;

  • “Live events”, such as work collaboration, business events and conferences, concerts, sports events, and immersive films and experiences;

  • E-sports; and

  • Automotive, architectural, and engineering design.

Facebook is putting its money where its mouth is – approximately 20% of new job openings are related to Oculus. Despite Facebook’s capital investments and additional headcount working on Oculus and the metaverse, the fact of the matter is that the size and rollout of the metaverse is nearly impossible to estimate. However, we believe it is highly likely that we are headed towards some shape or form of the metaverse.

Once established, the opportunities will be endless, and Facebook will be on the forefront of this revolutionary change in the way we, as humans, interact with reality and the new virtual world.


Speculative Investments

The creator economy, ecommerce, and the metaverse – certainly the most speculative concept of the three listed – may be poorly executed and take far longer and much more expensive to build out than expected. In the case of the metaverse, it is possible that this virtual realm never truly materializes as something tangible, or customers may scrutinize the concept as something that has more risks than benefits to society, resulting in low customer uptake or heavy regulation from governments.

Apple’s IDFA / iOS Changes

Earlier in 2021, Apple announced iOS 14.5, an update to Apple devices that would ask users to opt-in to Identifier for Advertisers (“IDFA”) tracking if they would like advertisers, like Facebook, to use their online behavioural data to show relevant and personalized ads. This iOS update impairs Facebook’s ability to show effective ads to iOS users, which may result in lower ROI on ads, dissatisfied advertisers, and lowered CPMs.

However, advertiser behaviour has been changing considering these changes – ad spend is decreasing on iOS, while Android ad spend is increasing, shielding platforms like Facebook from some of the IDFA impact. Further, Facebook’s growing ecosystem could gather enough high-quality first-party data to provide immense value to marketers down the line.

Regulatory Scrutiny

Stronger regulatory oversight may limit growth opportunities and reach, and hinder current operations as they currently stand. Even if Facebook does not engage in anti-competitive practices, its association with Google, Amazon, and other large corporations that regularly face antitrust probes could direct regulatory and social scrutiny in the direction of Facebook.

New Competitors

Facebook sees more engagement from older demographics, while TikTok and Snapchat hold a large share of younger demographics, including Millennials and Gen Z. New registration interest in Facebook may wane as these newer social media platforms grow their user bases and establish strong network effects themselves. Facebook may not be able to purchase most of these social media apps due to their size and lack of alignment with Facebook’s internal goals.

Bottom Line

Facebook is one of the largest companies in the world, and for good reason – it brings together billions of people that would otherwise find it difficult to find free ways of communicating with each other by sharing photos, videos, talking, and texting. When the product is free to use, that means the user is the product. In other words, Facebook’s strong network effects drive engagement across its platforms, which attracts businesses to advertise to us and convert us to purchasers. 

Facebook still has plenty of growth avenues – some more speculative than others – that would unleash the inherent optionality Facebook possesses within its platforms. Ecommerce, the creator economy, and the metaverse are all attainable pursuits in which Facebook can be the leader. These growth opportunities are not unlike what Facebook has already built – multi-billion-user networks of individuals, businesses, organizations, and creators interacting, doing businesses, and sharing content. Facebook will likely be more relevant tomorrow than it is today - keep your eyes peeled.

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