Credit: Shutterstock photoFacebook (FB) has become an advertising behemoth, having generated more than $12 billion in annual revenue in 2014, the vast majority of it coming from advertising.
In the future, however, the social networking giant may derive additional revenue from its messaging platforms, as much as an additional $10 billion by 2020.
Deutsche Bank analyst Ross Sandler, who rates Facebook buy with a $100 price target, believes that messaging, an area where Facebook is dominant, is a key component to its future.
"Messaging apps are proving to be the starting point in mobile with very high engagement, a strategic position that should reap enormous benefits as FB builds out platform capabilities," Sandler wrote in a note. "The opportunity is massive, and we think shares should get out of their current rut as investors start to grasp the enormity of messaging."
Facebook ()Currently, Facebook has two of the most dominant messaging apps, one of which is Facebook Messenger, which recently surpassed 700 million monthly active users. It also owns WhatsApp, with 800 million users, which it paid $19 billion in cash and stock for in 2014.
Facebook CEO Mark Zuckerberg has previously said platforms become interesting for monetization around 1 billion users. Messenger has started to experiment with making money, allowing payment transfers between friends. WhatsApp charges $1 a year for use, but these are fractional amounts compared to Facebook's $12 billion in annual revenue.
By 2020, Sandler expects these services to have more than 2 billion users, generating $3 in revenue per user, giving investors reason to pay up for Facebook shares.
Initiatives like games, payments and online to offline and other forms of making money could be huge initiatives for Facebook, simply given the size of these platforms.
Similar strategies work around the world for some of the larger messaging apps, including WeChat, Line, KaKao and others.
These types of services are generally low-cost, high margin, with Sandler predicting they could have 70% EBITDA margins, above the 60% for Facebook's core business.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
