Facebook announced that with various investors, a new cryptocurrency, Libra, will be launched in 2020. The company will also make its own digital wallet, Calibra, available in 2020. While these announcements may strengthen the wide-moat firm’s network-effect moat source because Facebook’s 2.4 billion users, and apps such as WhatsApp and Messenger, could be more effectively monetized, in our view neither the cryptocurrency nor the digital wallet will drive the firm’s top- or bottom-line meaningfully during the next few years. We are maintaining our US$200 per share fair value estimate and recommend that new investors wait for a wider margin of safety before allocating capital to this wide-moat and high uncertainty brand. The stock is up 44% this year and trading at only a 6% discount to our fair value estimate.
Libra will be the digital currency that Facebook and other members of the Libra Association (which will monitor the development of Libra, and technically align and maintain nodes and open-source platforms) launch early in 2020. According to the white paper published by the association, the currency is likely to be less volatile than other cryptocurrencies such as Bitcoin, because Libra will be backed by bank deposits and short-term government securities held in the Libra Reserve, and which will be managed by the association. While the association currently has 28 “founding members”, this is likely to rise to 100 by early 2020. Investments made by the 28 founding members include at least US$10 million each and some may become node operators for the currency’s blockchain. In addition, each member is limited to one vote or 1% of total votes. Current members include MasterCard, Visa, Uber, Lyft, Spotify, Andreessen Horowitz, Coinbase, Booking Holdings, Women’s World Banking, and more. Facebook also hopes its digital wallet Calibra will be able to be used anywhere and also by non-Facebook users.
Not likely to monetize for years
While the costs of Libra’s development and its blockchain are probably minimal for Facebook, in our view, the creation of Libra will not result in a significant improvement of the firm’s user monetization during the next few years for different reasons. First, we do not expect that the revenue generated directly from the currency or Calibra to be material, because we think the non-fee services, such as peer-to-peer payments, are likely to attract users to the currency and the wallet. The Libra Association and Facebook are initially targeting consumers without bank accounts, which as stated in the association’s white paper, total about 1.7 billion adults worldwide.
Second, according to Facebook, data related to transactions using Libra will not be used to attract more targeted advertising dollars to the Facebook or Instagram platforms. Again, Libra will be monitored by the association. However, while the firm has not explicitly said this, we think it maybe able to use transaction data from its digital wallet, Calibra. But in our view, the firm may face significant regulatory restrictions. Third, Libra is an open-sourced platform which means other apps that compete with Calibra can and are likely to be developed. Plus, the currency can be used to make purchases or transfer funds by Facebook-and non-Facebook users. Even if Libra is adopted widely, it is not likely to bring everyone onto Facebook’s platform or digital wallet.
Network effect will be key
However, in the long-run, we think Facebook’s network effect may benefit from the possible extensive adoption of Libra. In our view, with 2.4 billion users, Facebook can attract many merchants or retailers to Calibra and therefore accept payments with the digital currency Libra. Because a wider range of products and services may become available on Facebook’s marketplace, which already attracts nearly one billion users a month, it may attract even more users. Additionally the same can apply to Facebook’s Instagram and its Checkout feature. In addition, the ease-of-use that Calibra may offer could help WhatsApp and Messenger users embrace e-commerce, and possibly even other tasks and services, similar to Tencent’s WeChat. On the advertising side, while user growth will continue to decelerate, we think the time spent on Facebook may increase as more transactions may be conducted on the firm’s platforms. In our view, this alone could attract more advertising dollars.
In addition, if Libra becomes widely adopted, Facebook (along with other association members) will receive interest on the Libra reserves. According to the Libra white paper, after using some of the interest on those bank deposits and short-term government securities to cover the Libra Association costs, the remaining interest will be paid to members.
While potential long-term benefits from the launch of Libra and Facebook’s Calibra may be attractive, the regulatory risks, which the firm is confronting currently, could prevent Facebook fully realizing the benefits. First, in the U.S., as we highlighted on June 5, we think the news of the Federal Trade Commission possibly investigating Facebook over alleged antitrust issues may affect the commission's decision about the data privacy settlement, which according to Facebook may require a payment of $3 billion to $5 billion by the firm. While possibly unintentional, the commission's move on alleged antitrust issues, combined with the news that Libra, may reduce any influence that Facebook might have had regarding a finalized data privacy settlement amount. We could also see further negative reaction from Europe. According to Bloomberg, a German member of the European Parliament, Markus Ferber, said Facebook may become a “shadow bank”. Last, while users continue to access Facebook, Instagram, WhatsApp, and Messenger, they may not have enough trust in those platforms to immediately embrace Libra and Calibra.
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