- Facebook disclosed through its blog that it is opening a 22,000 square foot hardware lab.
- The infrastructure is expected to be complementary to its core business.
- Massive capital spending and R&D usually results in higher market capitalization.
Social media giant Facebook (NASDAQ:FB) announced last month the opening of its new hardware laboratory named "Area 404." The 22,000 square feet laboratory, which took months to complete, is located in its Menlo Park office and will have a dedicated space to design servers for the company’s data centers, drone propellers and develop virtual-reality hardware for Oculus.
Since the launch of the Open Compute Project (OCP) in 2011, the company has undertaken several hardware-related projects, which has been fueling discussions on whether Facebook is investing to become a hardware company in the future. For instance, OCP was launched to focus on the development of infrastructure projects.
It is noted that these initiatives were not cheap as they require billions of dollars that have already been channelled to these ventures. The latest trailing 12-month figures show that capital spending for Facebook was already at around $4 billion, which has been increasing significantly, up from $293 million in 2010. Additionally, R&D has also been sizeable, with trailing 12-month figures of $5.3 billion, which is also a substantial growth from $144 million in 2010.
Chart: Facebook Capital Spending + R&D Expenses from 2010-2015 ($ millions)
Source: Facebook Annual Reports
Infrastructure Supports Its Core Business
Facebook has made several big-ticket acquisitions in prior years, resulting in new product additions, namely Instagram, WhatsApp and Messenger. These products could survive on a stand-alone basis, noting that these applications have solid customer bases; generating substantial revenues. As such, Facebook’s investments in these companies are solely to diversify the revenue sources of the company.
On the other hand, these investments into hardware infrastructure are mainly to support its core operations. The 1st half revenue figure of $11.8 billion is still mostly derived from its advertising revenue. As such, the company has been increasing its spending on connectivity projects, including Internet.org, Aquila and Open Cellular.
Moreover, the company has also been trying to pursue various connectivity solutions such as the acquisition of a virtual reality company called “Oculus.” It would come as no surprise that Facebook is expected to continue investing in these ventures over time. While other companies have been scaling back on their investments, cutting down costs and repurchasing shares, it seems that other technology companies, including Amazon.com (NASDAQ:AMZN), are investing massively for the future.
CEO Mark Zuckerberg provided an aggressive 10-year road map for the company. The 10-year road map features Artificial Intelligence, Virtual Reality, Augmented Reality that could attract potential users to Facebook. Also, the addition of other communications apps such as WhatsApp and Messenger fit in with Zuckerberg’s idea of one social media platform. Facebook users could expect further product enhancements and add-ons on a regular basis.
Assuming that Facebook will generate full year revenues of $24 billion, the run-rate for capital spending and research and development is 39% of revenues. The figures are staggering and investors could be overwhelmed by the size of investments in these ventures. The question appears really simple: will these investments produce gains for the company?
Revenues have increased 13-fold from $1.97 billion in 2010 to an expected 2016 run-rate revenue of $24 billion. However, we note that historical figures may seem impossible to replicate due to the size, and it is safe to assume that these investments would likely translate to results for Facebook over the long run.
Further, there have been studies showing that companies who have invested intensively are greatly rewarded through increases in share prices. When you think of how Silicon Valley startups grew, this idea makes a whole lot of sense. Facebook is still a relatively young public company, and its management has shown confidence in the future as it has continued to invest in these ventures. Only markets and time could confirm whether they are doing the right thing or not.