Facebook, Inc. (NASDAQ:FB) is entering blockchain and cryptocurrencies with Libra Coin, Sven Carlin provides an investment thesis on the company’s stock.
Facebook Stock Investment Thesis With Libra Coin
Q1 hedge fund letters, conference, scoops etc
Transcript
Good day fellow investors. After months of anticipation Facebook finally did it. They launched their cryptocurrency called Libra an administrative subsidiary where they will make their money called caliber. The coin will go live only in 2020. But as investors in stocks as stocks always anticipate what will happen. We have to look ahead and try to anticipate what will be the effect on Facebook which is a covered stock on this channel publicly. I am also long a few shares of Facebook so I want to see whether this impacts my investment thesis for Facebook how it impacts and what might happen. So let's start. So in ancient Rome the Libra was a unit of weight. And Facebook is adding the Libra to the cryptocurrency. It's a craze. And the block chain technology.
The difference between Facebook and all the other coins and everything is Facebook scale power. Software engineer it engineers that can develop it grow it and then they have a great user base. A former day two point four billion people and they also partnered with huge names which make this let's say the most powerful coin that has been launched up to date. If we just look at the partners in the coin project we have MasterCard, PayPal, Stripe, Visa, Booking, Lyft, Uber, Vodafone and many other investors in the coin. That will give its power that will give the value to the coin by investing capital into it. The Libra story is very simple they want to create something that allows for easier transactions faster transactions to cater to the nonbank that are billions in the world. So to make what Facebook is in the messaging world connecting people to make it also in the financial world connecting people in the financial world to easier transactions. Of course there is a profit side to it. When people start trading buying things on Facebook to clicking on to Facebook ads I don't know when booking you're paying with Libra or paying directly.
Facebook will get the cut on that and therefore Facebook might increase their revenues in the future. Barclays estimated that Facebook scrip the currency revenue could be already at 19 billion in 2021. That would be a huge bonus to Facebook as their profit margin might be 50 percent. So that's just 10 billion on ADD of added income. However such projections are really futile. Libra will either succeed or fail. Given the networking effect the scale. It either goes big or it fails. And that's what Facebook also knows. If it succeeds and let's say that in 10 years the transactions with Libra amount to I don't know 500 billion. And Facebook profit on that is 50 billion on a 40 percent margin. It means that Facebook net profit from this project in 10 years could be 20 billion dollars. Given the growth given the scale given the idea given the technology let's attach a price earnings ratio of twenty on those 20 billion dollars and you have a market capitalization of 400 billion. Add that onto the current market capitalization and just this project might add 75 percent of Facebook value over the next 10 years. If it succeeds if it doesn't succeeds it's just another one of the things Facebook is testing and you never know which one of those will explode scale go into the network effect and become a huge profit contribution for Facebook.
If we just think of Instagram seven years ago they paid just 1 billion for it and now it is the growth engine of the company. Then with huge promises from Instagram shopping future huge revenue growth from the ads from stories from everything and we will still see how will Facebook monetize that in the future. So you always think of Facebook like a company with a lot of blocks. If the blocks fail it isn't such a big cost for Facebook. 1 billion is not the cost but if one succeeds scales network effect then it's a huge huge gain. We will see whether Libra will. It's become a success or not. It's too early to talk about the details so it's really a waste of time. We will see. Nobody knows. The technology is still in early development like the early development of the Internet. But there is potential.
