1. Facebook, Inc. (NASDAQ:FB)
Number of Hedge Fund Holders: 257
Topping the list of 12 best artificial intelligence stocks to invest in right now is American energy company Facebook, Inc. (NASDAQ:FB). The social media platform Facebook has over 2.89 billion active users.
Facebook, Inc. (NASDAQ:FB) recently developed its AI system DeepFace. Deepface is an AI-powered platform that assists users in recognizing people in photographs and tag people they know. Another AI-powered platform that Facebook developed is the Facebook translation feature which allows users to stay more connected by translating posts that appear on their newsfeed.
On July 29th, Truist analyst Youssef Squali raised the price target of Facebook, Inc. (NASDAQ:FB) to $425 per share from $400 per share and kept his Buy rating on the stock, highlighting the company’s strong Q2 results driven by the growth of higher advertising prices amid macroeconomic improvements and continued strength in commerce.
Facebook, Inc. (NASDAQ:FB) has a market cap of $1.02 trillion. In the second quarter of 2021, Facebook, Inc. (NASDAQ:FB) reported an EPS of $3.61, beating estimates by $0.59. The company’s second-quarter revenue came in at $29.08 billion, beating consensus estimates of $27.82 billion. Shares of FB increased 25% in the last twelve months.
At the end of the first quarter of 2021, 257 hedge funds in the database of Insider Monkey held stakes worth $40.96 billion in Facebook, Inc. (NASDAQ:FB).
SaltLight Capital Management mentioned Facebook, Inc. (NASDAQ:FB) in its Q2 2021 investor letter:
“At SaltLight, we’re giddy with excitement when we uncover businesses that the market has not “discovered” yet. Our composure also weakens when we find a business that is ‘hiding in plain sight’ and market participants are underestimating the duration of a moat or under-appreciating a strategic shift into a new business (our heart skipped a beat with Transaction Capital’s recent acquisition of WeBuyCars).
Whilst an investment in Facebook is unlikely to win awards for being original, we must remind ourselves that our job is to find durable and indispensable businesses that have great odds in creating long term returns for investors who trust us with their hard-earned capital. We cannot think of a better company than Facebook.
Our incongruous path to working on Facebook came after exploring Southeast Asian and Japanese B2C companies (a story for another day). In discussions with these businesses, the common challenge confronting them is acquiring new customers (particularly during the COVID period). Facebook and Google kept coming up as the most effective way for targeting new customers. This spicy insight was the indispensability that we were looking for.
The share price was unreconcilable to the implied value over the next 3–5 years and, optionality that exists with new initiatives. The decision to deploy capital became rather easy.
Critics will argue that Facebook has a deep market penetration already (almost half the world’s population of 3.5bn monthly active users across Facebook, Instagram and WhatsApp) and an obvious question to ask is – how much juice is left?
Our view is that the growth of users is less important; monetising the strong network effects across its platforms and the balancing act of capturing value vs. facilitating value is the more important question for future returns.
Our broad thesis rests on (1) moving down the transaction stack, (2) monetising WhatsApp, (3) enhancing discovery and (4) the optionality around the “next consumer platform”.
Regulatory challenges will always be a potential headwind. The impact of Apple’s changes to IOS (App Tracking Transparency) is still unknown. However, the question to also ask is: what’s in the price. Our letter is on what we think is not in the price.
The Advertising Engine
First, it is helpful to give a brief overview of the current profit engine. Digital advertising has essentially democratised ad buying – from blue chips right down to SMEs and increased the surface area of targeting high-propensity-to-buy customers. The true genius of the online advertising model is:
• Long-tail of potential customers: The potential ad inventory is so much larger (e.g., women in their 20s within a 10km radius who are away from home)
than the inventory from a print magazine or TV commercial slot (e.g. the ten LSM categories)
• Quantitative measurement of ROI: Advertisers can measure the performance of ad spend at a very granular level vs. the ‘spend and pray’ approach to traditional advertising. Facebook makes it simple and affordable to reach customers that a business truly wants. Much of Facebook’s revenue comes from direct response advertising such as joining a list, buying a product, visiting a store, or installing an app.
Their advertising distribution base (from blue-chip companies to SMEs) combined with advanced algorithms fed with data from 3.5 bn users creates an incredibly durable moat. This 2020 survey2 demonstrates how effective social commerce on Facebook is compared to other platforms. Despite its rapid adoption, TikTok still trails behind Facebook platforms considerably.
Readers will recall that, across its platforms, Facebook shows a targeted ad (figure 1 show that their ad targeting is impeccably tuned to our interests), and the user clicks the ad to which they jump onto another site.
Once on the seller’s site, the user’s experience varies greatly and is highly dependent on the seller’s technical sophistication. For SME’s, this is not their
core competence. And for buyers, painfully, they need to keep entering their credit card details for each new website (with the associated risk of fraud with each new entry)
Over the last year, management has been strategically developing products to move up (discovery) and down (checkout and payments) the eCommerce stack.
In 2020, Instagram shops were launched where a user can purchase directly via an Instagram account. The only part of the transaction left for the merchant is shipping.
These features have taken off considerably in one year. As of June 2021, they already had 300 million monthly Shops visitors and over 1.2 million monthly active Shops.
Monetising WhatsApp
Our thesis over the next few years is that WhatsApp will be increasingly monetised (Zuckerberg is playing the long game after buying it back in 2014!) and will be an integral part of the Facebook/Instagram shopping architecture.
At this stage, WhatsApp is virtually unmonetised and therefore is not meaningfully appearing in the income statement (and valuation multiples).
Since we have invested, the pace of monetisation of WhatsApp is gaining steam.
• Consumer to business interactions over chat.
• Payments from WhatsApp are already available in Brazil and India.
• Shopping directly on WhatsApp
Monetisation here is likely to still be predominantly ad revenue, however, management is disclosing a 5% take rate on GMV4 on its Facebook marketplace and shops products. This is likely to carry across to the WhatsApp store.”
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