Facebook is akin to a cigarette business
Warren Buffett said this:
"I'll tell you why I like the cigarette business… It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty."
Buffett is saying that if you can find a business that is addictive, cost almost nothing to produce the goods and services, it has the ability to consistently growing, then it will be a good investment.
Facebook seems to fit into this business model.
Facebook helps to solve one of human's psychology issue - boredom. Whenever a Facebook user is bored, he or she can go to Facebook to find out what other people are doing. Over time this creates addictiveness, just like a cigarette.
According to statistics, there are 1.3 billion Facebook daily users spending 15 min a day on Facebook. The number of daily users has been growing.
The contents are provided by Facebook users themselves. Hence it costs little for Facebook to produce the content.
Facebook is able to monetise on its huge number of daily users and grow its earnings.
According to bloomberg, Facebook trades at forward PE of 23x. If Facebook can continue to grow at 20% to 30% annually, Facebook would be undervalued at today's price.
"I'll tell you why I like the cigarette business… It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty."
Buffett is saying that if you can find a business that is addictive, cost almost nothing to produce the goods and services, it has the ability to consistently growing, then it will be a good investment.
Facebook seems to fit into this business model.
Facebook helps to solve one of human's psychology issue - boredom. Whenever a Facebook user is bored, he or she can go to Facebook to find out what other people are doing. Over time this creates addictiveness, just like a cigarette.
According to statistics, there are 1.3 billion Facebook daily users spending 15 min a day on Facebook. The number of daily users has been growing.
The contents are provided by Facebook users themselves. Hence it costs little for Facebook to produce the content.
Facebook is able to monetise on its huge number of daily users and grow its earnings.
According to bloomberg, Facebook trades at forward PE of 23x. If Facebook can continue to grow at 20% to 30% annually, Facebook would be undervalued at today's price.
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