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Valuation of Facebook E-money Potential

Valuation of Facebook E-money Potential

posted by Virendra Singh Chauhan | published by Amigobulls on
  • Facebook has applied for an e-money license in Ireland. An approval will enable it to provide its e-money services to process payments throughout Europe.
  • We estimate the gross payments potential generated through online stores on Facebook, which presents Facebook with a huge opportunity.
  • Having an in-house payments processing service will enable Facebook to pocket the commissions generated through sales on its platform, adding significantly to its topline and bottomline.

 

Facebook Payments potential

Facebook (NASDAQ:FB) has filed an application for an e-money license in Ireland, a regulatory approval of which will enable it to offer its e-money services throughout the European Union. Are you beginning to wonder as to what would Facebook have to do with an interest in the finance/banking sector? Well, it did surprise us at first, but careful thought brings out a clear strategy which is at play here. Mark Zuckerberg’s push into the e-money market could be a step to harness the huge e-Commerce potential of a 1 billion+ user strong platform.

 

Why an e-money License?

The e-money license will allow Facebook to handle transfer of funds by its users. In other words its users will be able to buy goods/services and pay for the same using Facebook’s payment services. The license will help Facebook leverage its huge user base and the e-commerce activity on the platform to generate processing fees from stores listed on its platform. The obvious question which now arises is how big is the e-commerce activity on Facebook?

 

E-commerce activity on Facebook

While it is common knowledge that Facebook is becoming a default advertising platform to reach the mobile masses, another fact not as apparent is the e-commerce activity which is currently taking place on Facebook. There are a number of stores listed and selling their wares on Facebook, who not only make use of Facebook’s ability to target users but also sell their products/services on the platform.  While there is no number given out by the company as to the amount of e-commerce activity on the platform, we try and arrive at the e-commerce potential of current user base using data from the Facebook’s SEC  filing and e-commerce industry reports from eMarketer, which puts the e-commerce industry market size at $1.5 trillion by the end of 2014.
 

Geographic region

FB users (in millions)

Total Population (in millions)>

Total e-Commerce market ($ in billions)

Facebook e-commerce potential at 5% market share ($ in billions)

US and Canada

202

356

483

24.2

Europe

289

739

405

20.3

Asia

390

4140

525

26.3

Rest Of World

395

1976

92

4.6

Total

1276

7211

1505

75.3

 

Using a linear distribution of e-commerce spending among a regional population and an assumption that Facebook will eventually capture 5% of global market, we arrive at the potential e-commerce activity on Facebook. Under the above assumptions, we estimate e-commerce activity on Facebook could be resulting in payments of $75 billion.

 

Potential payment processing Fee using Facebook e-money

The potential e-commerce activity being carried out on Facebook is huge and it is here that the e-money license will come in handy. Facebook can even tie-up with existing e-tailers to provide an alternative payment mechanism as well as social integration. Won’t you feel more comfortable buying a product which your friend has bought/recommended? Having an in-house payment processing service could net Facebook close to $1.5 billion in annual commissions at a take rate of 2%, compared to PayPal’s take rate of 3%.

 

Conclusion

The e-commerce activity on Facebook could be huge given the strength of its user base. There are currently over 60000 stores listed on Facebook, which can be expected to grow given that every seller today wants to have a presence on Facebook. Given the e-commerce potential of the platform, an in-house payment processing service would be a perfect strategic fit into Facebook’s operations. It will generate significant topline growth with a significant proportion showing up on the bottomline. E-commerce is just one derivative of the number strength which the social network enjoys. The huge user base also presents a multi-billion dollar opportunity for Facebook in video ads space. Having seen the huge potential, we still believe Facebook to be an expensive and risky buy at its current valuation multiples with a LTM P/E multiple of 82 and a LTM P/S multiple of 17.5. At these valuations Facebook is an investment alternative for an aggressive investor with a higher appetite for risks, given the huge expectations priced into the stock. Is Facebook a buy or sell?. We have a hold rating on FB stock.

 

To see Facebook’s latest stock price movement, click here (NASDAQ:FB)

Disclaimer: We do not hold any stake in the aforesaid stocks. Please read our detailed disclaimer.

About the author

Virendra Singh Chauhan
Virendra Singh Chauhan is a Financial Analyst at Amigobulls. An MBA(Finance) with specialization in investments, Virendra is a value investor who loves to analyze stocks and involve in discussions regarding investments in general. His areas of interest include personal finance as well as entrepreneurship, apart from equity analysis in particular. He loves companies with strong cash flows and profits today rather than companies built on promises of future. Contact him at virendra.chauhan AT amigobulls.com.
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