How Facebook Inc Conquered The World

Do you remember the first dotcom boom?

If you’d bought shares in those high-flying companies that were part of the alleged “new economy” and were burned when they crashed, you’ll surely never forget it. The real problem back then was that everyone could see the power of the internet, but few had any idea how to make it pay.

But wind forward more than a decade, and Facebook (NASDAQ: FB.US) seems to be doing it right — and conquering the world as a result.

Not that it’s all been plain sailing. After an IPO in 2012 at $38 per share, which priced the social media company at more than the value of Amazon and Cisco, the share price crashed by 50%. But it steadied a little towards the end of that year, and since mid-2013 it’s been storming ahead. At $80 per share today, initial investors have more than doubled their money.

Third-quarter results day on 28 October did give the shares a jolt, mind, with the price falling 10% in after-hours trading. Although Facebook saw revenue rise 59% to $3.2bn and the firm recorded its best ever quarterly profit, it did slightly miss expectations as costs rose by 41%, largely due to acquiring 1,200 more employees due to takeovers. Diluted earnings per share rose 76% to 30 cents, while average daily users rose to 864 million with monthly active users up to 1.35bn!

Facebook’s big secret

Back in the year 2000 the secret was supposed to be advertising, too, but internet usage was much lower then and online advertising was really very crude — just doing it exactly the same way you would in newspapers and on billboards, and hoping that one in ten thousand people might notice, just didn’t bring in the riches its proponents had promised.

Many ways of targeting advertising have been tried that involve tracking what people are buying or thinking of buying, but there have been some serious backlashes against various snooping techniques.

But then you’ve got Facebook and its 1.35 billion monthly users, regularly telling everyone who’ll listen about what they’re buying now, what fashion trends they’re following, what they’re going to have for lunch, and so on…

Let’s face it, very few people are actually interested in any individual’s self-obsessed drivel other than similarly-minded friends. And advertisers. Oh yes, advertisers!

Facebook is by far the biggest and best-targeted advertising mailing list that has ever been put together. “I fancy a burger/stinky tofu/surströmming for lunch” and bingo — ads from your local takeaways right in your face, and without anyone having to do any snooping on you.

And there’s nearly 20% of the entire population of the planet doing it already!

Where will it end?

The future? It’s very hard to put valuations on all of this right now, but the potential for very high-quality targeted advertising (including mobile advertising, which is fertile new ground) must be enormous.

Facebook has certainly propelled many an investor to great wealth, but is it one to buy now for the next few decades?

Well, check out the latest Motley Fool free report that tells you how you could become Seriously Rich, just by following a few fundamental steps. You might not catch up with Mark Zuckerberg in the wealth stakes, but you could realistically emulate retired teacher Margaret Dickson who left £1.1m in her will, accumulated through long-term investing in stocks and shares.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Facebook. The Motley Fool UK owns shares of Facebook. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.