While it is nice to know that the Facebook and Spotify duo are doing extremely well, after doing a thorough search of Facebook’s SEC filings I was unable to find any managerial accounting data that alludes to the revenue contribution that comes directly from Spotify. Also, Spotify is not a publicly traded company so it is impossible to estimate the exact contribution to Facebook’s profits. Plus, it doesn’t help that Mark Zuckerberg (captain of Facebook’s ship) likes to hide details of his past, along with the company’s finances (remember how Mark hid the accounting data of materially significant risks from the mobile segment from shareholders prior to IPO?).
Double down on Facebook
Facebook’s recent acquisition in Instagram was a success despite the controversy surrounding the content right disclaimer.
Facebook has seen phenomenal growth in the past 3-years, and in order to sustain that growth Facebook has been aggressively investing into research and development. Spending in research and development has nearly tripled over the previous year. No one in Silicon Valley really knows what Facebook’s next Manhattan project really is, but small successes through intelligent acquisitions like Instagram, along with practical product development strategies with Zynga Inc (NASDAQ:ZNGA) and Spotify have helped the company to maintain reasonable earnings growth.
It is difficult to determine whether or not Zynga Inc (NASDAQ:ZNGA)’s social gaming platform was a flash in the pan success. The stock has crashed from its all-time highs of $12.50 (the stock currently trades at $3.18). Zynga provided weak guidance for the first quarter of 2012. The company’s losses are driven by declining demand. Despite the declining user statistics, it is likely that Zynga will be able to rely on its loyal customer base, to keep the company from becoming insolvent. Eventually, Zynga will figure out a strategy to maximize profits. For now, though, Zynga consistently mails checks to Facebook.
Facebook monetization
Some may question whether or not Facebook can further monetize itself without charging its customers a monthly subscription, but I feel highly confident that Facebook will continue on its product development road-map with continued success. The company continues to expand internationally, and with more than 7 billion people in the world, Facebook’s current 1 billion user base may not be as big as everyone is trying to make it out to be.
Conclusion
The social network merits a higher valuation despite declining net income growth and soaring research and development costs. Facebook will sustain growth through unique products in development that work hand-in-hand with its social network, and examples of this includes Spotify. Facebook will sustain growth through successful buy-outs (Instagram) and will experience continued growth outside the United States. Facebook mobile ads can become better monetized–or better yet, Facebook could start charging users for the Facebook mobile app.
Facebook could easily surprise analyst estimates in future years through slight changes in its business model, successes from its acquisitions, or through product developments that investors are not aware of yet.
The article Never Underestimate Facebook originally appeared on Fool.com and is written by Alexander Cho.
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