Facebook (NASDAQ: FB) - Hold Thesis

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This week we’re diving deep into one of the behemoths of technology - Facebook. The omnipresent and monopolistic social media business that has taken over mobiles and computers all over the world.

Author’s Note: This was written prior to Facebook rebranding as Meta

  • The Facebook monolith and its recent financial performance
  • Data privacy laws and their impact on Facebook’s growth
  • Facebook’s growth aspirations and its purpose to connect the world
  • Integration across the social media stack and predicting Facebook’s next move

We all know what Facebook is, and chances are, you’re probably using it. But do you really know what is it?


Facebook is a technology company that owns a suite of social media and technology applications. The core of their business sits across four key social media apps:

  • Facebook - The Facebook app is a social media platform that enables users to create profiles and connect with other users on the platform to communicate, transact and share content. Facebook monetises this app through the use of targeted advertising that is shown to users
  • Messenger - Originally part of Facebook and eventually spun out into its own app. Messenger is an instant messaging app where users can send online messages to each other. Recently it has also enabled B2C messaging, allowing businesses to directly message and interact with their customer base
  • Instagram - Acquired by Facebook in 2012 for $1bn, this has arguably been one of the most successful technology acquisitions of all time. Instagram is a photo and video sharing social media app that enables users to post and share digital content with their followers. Similar to Facebook, this app generates revenue through targeted advertising to its users.
  • WhatsApp - Another messaging app, this one was acquired for $19bn in 2014. Currently WhatsApp has limited integration with the other Facebook apps and has almost no monetisation

Additionally, Facebook has suite of other apps including Workplace, Facebook Reality Labs, GIPHY, Masquerade. These applications are less well-known but show the breadth of Facebook’s reach on the internet.

Currently, Facebook is a $84bn business, with over 3.45bn monthly active users (MAUs). This means across the globe, there are 3.45bn users who use one of Facebook’s core applications (Facebook, Messenger, Instagram or WhatsApp) every month.

There are currently 4.66bn active users of the internet on the planet, so based on raw numbers Facebook has a 75% penetration in their total addressable market. Once you factor out China (1.4bn people - where Facebook is banned), Facebook has an approximate 70-80% market share in their TAM. That’s unbelievable market penetration.

How does Facebook make money?


Facebook generates its revenue predominately from advertising. As a user on Facebook, you interact with a variety of groups, users and interests. You also broadcast your interests to the rest of the user base through comments and Facebook posts (we’ll refer to this as User Generated Content ‘UGC’). Facebook uses this information about you to show you targeted advertising based on your interests.

Packy McCormick compares Facebook and Google in this post here and outlines how Facebook can show you ads based on your interests.

While Google is intent-based -- I search for shoes and Google serves me ads for companies that make shoes -- Facebook is interest-based -- I am a 24-35-year-old male with feet who likes running, so companies that sell running shoes can reach me, and others like me, across Facebook’s properties (and on other sites via its Audience Network). Google can show me different variations of something I want, Facebook can show me products I didn’t even know I wanted.

We discuss this in our podcast - based on your Facebook profile, Facebook can show you ads for products and services within multiple degrees of the content you’re interacting with. For example, if you interact with content on ‘podcast microphones’, Facebook can start to send you ads for headphones, podcasting studios and even soundproofing panels.

Facebook’s ‘customers’ are businesses who are looking to advertise to Facebook’s users - they pay money for access to your attention through their apps. As Facebook increases its penetration in markets and becomes more mature, more and more of your screen will become advertising, further increasing and growing their revenue.


How does Facebook’s advertising algorithm work?

The Facebook algorithm is the machine behind its incredible growth. Facebook’s ability to show the right ad to a specific user is one of its core competitive advantages. How does it work?

  1. Facebook takes inventory of every possible post available in a user’s network in order to predict what type of content people would want to see in their feeds,
  2. The system then scores each of these posts based on the signals a user gives to them (likes, shares, comments, tags, and so on) to predict how valuable a user would find these posts.
  3. Posts that are most unlikely to engage the user are then discarded based on past behavior. These are the posts that a user would have indicated not to like and see less of as they present misinformation or clickbait content.
  4. After narrowing down the relevant posts with a final score, the system then ranks the ones that a user might take an action more often on than the others.
  5. And finally, Facebook arrives at a sweet spot of presenting the most proper content in as many varieties and sources as possible.

What is Facebook’s strategy?


Source: BCG

Facebook is one example of a platform business that operates a ‘digital ecosystem’, and you can see how their actions in the market reflects the stages in the above diagram.

In mature markets, Facebook is focused on monetisation - creating value through advertising and enabling businesses to grow and expand their own businesses as a direct result of Facebook’s many platforms.

In other markets, EMEA and Asia Pacific, Facebook is still at the first stage of this process and trying to grow its user base and build network effects. Once it hits critical mass, they can skip steps 2 and 3 because their product is already mature and monetise their platforms.

This also holds true in the other segments that Facebook chooses to play in - consider WhatsApp, one of their portfolio platforms. One could argue they’re at stage 2 or stage 3 of this process. They don’t need to invest resources into growing its user base because when they acquired WhatsApp, it was already at critical mass as a platform. But since its acquisition, Facebook has rolled out improvements to the platform and once they begin to monetise it, Facebook taps into a new revenue source that targets over 2bn active users around the world.

This is a tried and tested playbook by Facebook. We’ve seen it happen with their own platform, now Instagram and in the future WhatsApp. When you consider their broad suite of applications and how they start to move from the ‘Grow’ phase to the ‘Monetise’ phase, they’ll continue to seek new areas of the market they can add to the ‘Facebook’ ecosystem in order to continue their strong growth trajectory.

How has Facebook been performing?


Facebook is a cash machine with incredible profitability and a strong user base. If you placed these metrics on an investment thesis, scrubbed of any company names, you’d probably think this is an amazing business:

  • Revenue growth: Averaging 28% YoY between ‘18 - ‘20
  • Profit margin: EBIT margin of 38%,
  • Monthly active users: Averaging a 13% YoY increase between ‘18 - ‘20
  • Average revenue per user: Increased by 48% in the last year

Combined this with its market penetration and future growth prospects as they increase their penetration in other geographies (they predominately generate their revenue from US and Canada), Facebook becomes an incredibly attractive business for investors.


But once you reveal these amazing metrics belong to Facebook, it becomes less attractive despite the strong financial performance. Facebook has a lamentable brand and reputation amongst Governments and the media and this casts doubt on the long term prospects of the business.

What are the regulatory risks surrounding Facebook?

Facebook has been the subject of countless regulatory investigations, negative media headlines, documentaries and articles by disgruntled employees. It has been involved in scandals, implicated as a tool used to influence the US election, and more recently, temporarily banned Australian news from its platform. Facebook is in the crosshairs of regulators around the world, and this is concerning because it questions how well Facebook could grow in the future. While the hammer has not yet come down, Facebook’s future is uncertain and despite its strong fundamentals, makes it difficult to speculate what the future holds.

Consider this 2 x 2. below. Each box represents a future for Facebook and the environment Facebook operates within.


Source: Fresh Capital’s ‘strategic analysis’ - we’ll trade you strategy work for a microphone!

Right now, Facebook is arguably living in the orange box - low regulation, low market consolidation. It’s thriving in this box. But as regulators look to restrict Facebook’s access to user data and threaten to break up the monolith, it may start to shift to the yellow or green future.

And in either of those boxes, Facebook’s future is uncertain, and subsequently, its future growth and financial performance.

But let’s assume for now, that Facebook remains in the orange box. What is Facebook’s future?

Facebook’s purpose is to give people the power to build community and bring the world closer together. As Facebook continues to acquire other platforms, increase its market penetration (especially in EMEA and Asia Pacific). We believe it could model itself down two future paths (obviously there are way more than two, these are just two examples of what Facebook could be)

  1. Full Stack Integration - Facebook takes a leaf out of Google’s playbook and starts to integrate across all its platforms. Facebook has started to integrate messaging across its platforms, but we mean full Google-esque integration. Facebook OS, Facebook hardware, Facebook Payments (this is a still a thing!) to become a fully integrated technology player. For Facebook, they can create a seamless user experience across all their platforms to enable users to connect across both software and hardware. Imagine using your Facebook VR headset and connecting it to your Facebook device, to interact with people around the world in real-time. Facebook starts to shift from social platform business to a complete platform business.
  2. Application Integration - Integrating all its applications into one app - akin to a Facebook OS. We’re talking a platform analogous to WeChat. No hardware and entirely software. Any interaction with another human being - social, transactional, societal. Whether its unilateral, bilateral, 1:1 or 1-to-many, its all done via Facebook. At the moment, Facebook does some of this through a few apps, but looks like it’s building the infrastructure to slowly integrate all its platforms into one.

Both these futures are interesting and possible for Facebook, especially as it starts to leverage its acquisitions - Oculus, Facebook Reality Labs (formerly CTRL-Labs) and even its hardware, Facebook Portal and move into either one (or both) of these future directions.

What’s your final verdict on Facebook?

Interestingly, as Facebook consolidates its position in the market through either one of those paths (or both), it will undoubtedly continue to draw the attention of regulators and the media alike. So as Facebook continues to execute on their aspiration to be where people connect and build communities, its future, and the attractiveness of it as an investment, will become less certain until regulators make a decision.

If you’re interested in more Facebook analysis and the impact of regulation on the business, check out the latest episode of our podcast here!

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One last thing! We know that Facebook is a behemoth of a business to cover and we can’t cover it all, so here’s some of our favourite analysis for extra reading: