Facebook is the largest social network in the world with more than 900 million monthly active users. It competes primarily with much smaller competitors like Google+, Twitter, LinkedIn (NYSE:LNKD) and Pinterest in the social networking space, and with Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO) for online advertising dollars. After Facebook’s abysmal IPO which saw its shares sink in the secondary market, investors are looking for fresh catalysts from the social networking giant. One such growth area we believe could hold tremendous upside is social commerce, which currently accounts for 5% of our $33 valuation.
Social Commerce: A Lucrative Market
Facebook makes money primarily from text and display ads and virtual transactions on its platform. However, we expect it to tap into yet another lucrative market to generate additional revenue – Social Commerce. Here’s an overview of how we think Facebook’s foray into this space will pan out:
Social commerce is related to online physical goods sales which are driven by social media, specifically sales generated through social media referrals or links shared on social networks. Social commerce sales could also be driven through online storefronts set up by businesses on Facebook to leverage their fan base to generate sales.
The global social commerce market is expected to grow from $5 billion in 2011 to more than $30 billion in 2015. We expect Facebook to drive a significant portion of social commerce transactions.
Given Facebook’s enormous scale, we expect Facebook’s market share in social commerce to increase steadily throughout the years, and eventually account for around a third of the overall market.
However, Facebook’s revenue share for physical goods will be much lower than that of virtual goods, which is why it will account for a much lower proportion of its overall value.
We expect social commerce to account for nearly 5% of Facebook’s overall $82 billion Trefis valuation. It might become a formidable competitor to Amazon, the leader in the e-commerce market.