FB Stock: Can China Be The Next Growth Driver For Facebook Inc.?

  • Facebook is attempting again to enter the Chinese market.
  • Total digital ad spend in China is likely to double by 2020 to $80 billion.
  • Can China be the next growth driver for Facebook?

Facebook is reportedly toying again with the idea of entering the Chinese market. The company was forced to leave China in 2009 after it refused to share personal details of its users with the Chinese government. Back then, Facebook said that freedom of speech and safety of its users are central to its founding philosophy. But given its size, the Chinese market is too lucrative for any company to ignore, including the world's largest social network. The company is said to be working on a software that could "allow certain third parties the capacity to control visibility and monitor stories and topics." Can Facebook crack the Chinese market this time?

Blocked But Not Banned - Is There Hope?

In 2009, the Chinese government had said that Facebook is not banned but blocked and could be unblocked if it follows the Chinese laws. Since then, Facebook has made several attempts to enter the Chinese market, but with no major success. The recent reports suggest that Facebook may be willing to somewhat compromise on its promise of free speech to enter the Chinese market.

A New York Times report states that "a team led by vice president Vaughn Smith has been working on a tool that monitors what popular stories and topics appear in a user’s feed, based at least partially on geographic origin. The tool can then be used to hide these posts." This latest move has already generated heated debate inside Facebook, with many employees taking issue with the latest move. When confronted by one of the employees Mark Zuckerberg is said to have stated that "It’s better for Facebook to be a part of enabling conversation, even if it’s not yet the full conversation."

Why Facebook Is Desperate To Get Into China?

So why is Facebook so desperate to enter the Chinese market? In Q3, Facebook reported that its monthly active users have grown to 1.8 billion users. But Facebook's user growth is likely to slow down as most of the markets, especially the developed ones are saturated. Facebook's current growth is driven mainly by Asia Pacific and Rest of The World geographic segments. While these two segments still have the potential to drive Facebook's user growth in the coming quarters, the low internet penetration in these regions will act as a headwind. Also, the revenue per user from these segment is one-tenth the revenue per user from US and Canada. In its recent earnings call, Facebook CFO had said that the ad growth will "slow meaningfully"going forward . (Also Read: Why FB Stock Is Overvalued Right Now)

China has the potential to solve both these problems. China already has a huge population who are on the internet and it also has a rapidly growing affluent middle class. China currently has more than 720 million internet users and with a 52% internet penetration rate, there is still a lot of headroom to grow. The growing affluent middle class means more spending, hence more ad revenues. According to eMarketer total digital ad spend in China will grow by 30% in 2016 to $42 billion and by 2020 the total digital ad spend is likely to cross $80 billion. That's a huge market Facebook is currently missing out on.

Can China Be Facebook's Next Growth Driver?

Facebook's road to China is still long and bumpy. It is not clear whether Facebook's current proposal will pass the Chinese test (or even if Facebook has made such a proposal to Chinese officials). Facebook has not been able to get a license to hire people for its Beijing office, which it had leased in 2014, even though the only purpose of that office is to sell Chinese ads outside China. But even if Facebook manages to convince the Chinese government, it will have to face heavy competition from local social media networks. Most of them have entrenched themselves into the daily life of Chinese people. These social media networks not only provide a platform for communication but also offer various other services including payment, taxi booking, shopping etc.

Facebook is likely to face stiff competition from Tencent's WeChat. WeChat has more than 700 million monthly active users, almost every Chinese who has an internet connection. WeChat is a communication, payments, taxi booking and eCommerce platform rolled into one. Also, Chinese people tend to prefer local networks. Last time Facebook was in China, it had around 285,000 users in the mainland, out of 225 million internet users. At the same time, Tencent's QQ was signing on millions of users. It will be difficult for Facebook to dislodge them. People who are likely to shift to Facebook would be those who have stayed in the west and want to keep in touch with their friends. But many of them are already using Facebook through VPN's. (Also Read: News Driven Sell-Off Makes Facebook Inc. (FB) Stock An Attractive Buy)

Conclusion

China has proven to be a difficult market to crack for most of the international internet companies including Google, Twitter and Facebook. Facebook's recent decision to develop tools which can help in limited censorship is another attempt by the company to enter the lucrative Chinese market. But while the success of this strategy is not yet guaranteed, this move may open up a pandora's box for Facebook with other governments demanding similar kind of tools. Even if Facebook manages to convince the Chinese government, it will still face stiff challenges from the local social media companies. China is not likely to be a growth driver for Facebook stock anytime soon.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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