Facebook Inc (FB)’s, Twitter Inc (TWTR)’s Potential In China

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Facebook Inc’s NASDAQ:FB and Twitter Inc’s NYSE:TWTR main websites may be blocked in China, but that apparently isn’t keeping them from trying to penetrate the world’s largest market. Recently there were reports that Facebook had set up a home office in China, sparking speculations about the possibilities. Also today an interview with Twitter CEO Dick Costolo indicates that they have big plans for China as well.

Opportunities for Facebook in China

In a report dated Aug. 7, 2014, Goldman Sachs analyst Heather Bellini and her team said that for right now, they aren’t including any impact from China in their estimates for Facebook. Nonetheless, they do say that the Chinese market represents a “strong” opportunity for expansion. As a result, they say there could be some upside to their estimates based on Facebook Inc’s NASDAQ:FB success in China, even though they view their potential penetration rates as being possibly conservative.

The Goldman Sachs team notes that China had 689 million internet users according to the World Bank at the end of last year. The country’s population is 1.4 billion. That number compares to just 296 million internet users in the U.S. and Canada. Of course Facebook’s main website is currently blocked in China, which prevents it from really penetrating the market there. In spite of that, however, the social network has managed meaningful growth there.

Estimates for Facebook in China

The Goldman Sachs team came up with a model based on Instagram, WhatsApp and Facebook’s potential re-launch in China. Hypothetically speaking, they estimate that Facebook NASDAQ:FB might be able to generate an extra $10 billion in revenue and $1.18 in non-GAAP earnings per share accretion in five years. Those estimates assume that Facebook begins to penetrate China in 2017 and hits a 20% penetration rate in 2021. That compares to Tencent Holdings Ltd’s HKG:0700 about 80% reach in China, according to data from comScore.

In their 2021 estimates, they assume that every 500 basis points of penetration would amount to an incremental $800 million in revenue and 10 cents on non-GAAP earnings per share each year. The Goldman Sachs analysts reiterated their Buy rating and $85 per share price target on Facebook.

Twitter management is optimistic on China

Facebook NASDAQ:FB competitor Twitter is also very interested in China, according to an interview CEO Dick Costolo gave to The Nikkei. Like Facebook, Twitter is also currently blocked in China. However, Costolo thinks that will change and says he’s “optimistic” about it after visiting China.

The micro-blogging platform has apparently been hiring more and more staff members to focus on negotiating with many of the world’s governments. According to Costolo, Twitters’ great user experience will satisfy Chinese customers.”

Twitter and censorship

The problem Twitter NYSE:TWTR has been facing is that the Chinese government wants it to accept censorship. The company is going to have to find a way to balance the Chinese government’s desire for censorship with its own view that free speech is important. Costolo said they won’t change the principles of Twitter’s platform, which suggests that they won’t easily cave to Beijing’s demands.

The company has already been working with governments in other countries, like Pakistan and Turkey. The micro-blogging platform now deletes and blocks some posts, like those that the Pakistani government sees as being blasphemous. In Turkey, Twitter NYSE:TWTR is also discussing regulations with the government, which blocked access to it earlier this year.

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