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Strong business model means Facebook stock is still undervalued

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Let’s take a look at a company that has one of the most advantaged business models in existence. That company is Facebook.

While it has been under siege in the news for data and privacy scandals in recent times, we believe Facebook’s business model remains strong, and we own it in our global funds.

The online technology platform has one of the greatest business models out there. In addition to its core Facebook product, the company also owns Instagram and Whatsapp. It has 2.6 billion people – an extraordinary number – using these digital properties every month.

Much like how the very first telephone had no value to Alexander Bell until he was able to call someone else, the value of the Facebook platform only increases as more people join.

Users are the suppliers of content, and each time they post something or upload a photo it adds to the rich, personalised nature of other users’ newsfeeds. This creates immense network effects as Facebook’s digital properties become a repository for the memories we all hold dear.

Facebook is an indescribably hard asset to replicate. If someone gave you $10 billion and asked you to steal away users from Facebook’s properties, it would be extraordinarily hard, if not impossible, to shift usage habits due to these network effects.

As people interact with the platform, enormous quantities of data are generated which can be used to refine Facebook’s ad-targeting algorithms. This means that Facebook is able to target users with a level of specificity and accuracy that advertisers simply cannot attain elsewhere. This has led to Facebook capturing share from other advertising mediums.

While there is an overhang on the stock due to the data scandal backlash and fears of regulation, advertisers continue to allocate budgets to Facebook, and we continue to believe it is undervalued.

Written by Roger Montgomery

Roger Montgomery

Roger Montgomery is founder, chairman and chief investment officer of Montgomery Investment Management. Following a successful career as an analyst and public company chairman, Roger published the first edition of his stock market guide, Value.able, in 2010, becoming an Australian best seller in just 16 weeks. He holds a Bachelor of Commerce and is a senior fellow of the Financial Institute of Australasia.

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