Facebook, Inc. (NASDAQ:FB) has made headlines several times in the last couple of months. Thankfully for investors, it was all for good reasons.
From the investment in Jio Platforms to the launch of Facebook Shops, the company has been tapping into lucrative opportunities while many other companies were struggling to survive this economic downturn. In the latest move by Facebook, the company rolled out WhatsApp Pay in Brazil to capture a share of the growing mobile payments market in Latin America. India was supposed to become the first country to experience a nationwide launch of this feature, but the company is still trying to obtain the regulatory approval of Indian authorities even after two years since the rollout of the beta version.
Facebook shares continue to trade at a discount to my intrinsic value estimate of the company, presenting growth investors with a potential opportunity.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Facebook Pay” data-reactid=”20″>Facebook Pay
The social media giant came up with the plan to facilitate global payments in 2018 when the company launched Facebook Pay. Since then, however, the going has been slow due to regulatory restrictions and the competition from local players in markets that Facebook wanted to tap into. Below are listed the payment solutions that fall under the umbrella of this payment processing feature introduced by the company:
- Facebook Pay
- Messenger Pay
- WhatsApp Pay
- Instagram Pay
Both Facebook Pay and Messenger Pay are available in the United States, and the former is live in 40 other countries. On June 15, Brazil became the first country to experience WhatsApp Pay. Instagram, on the other hand, is yet to launch these services in any country.
At the time of introducing this feature in 2018, many Wall Street analysts believed the company had to leverage its massive WhatsApp userbase to truly become a payment giant. In addition, international markets were expected to generate higher growth as American consumers already have a plethora of payment services to choose from.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Why Brazil matters” data-reactid=”30″>Why Brazil matters
According to data from Reuters, WhatsApp has over 120 million users in Brazil, which makes the country the second-largest market behind India. At the time of announcing this feature, WhatsApp chief operating officer of Brazil Matt Idema said:
“WhatsApp is heavily used there, both by people and small businesses. We think we can help grow digital payments, help grow the digital economy with small businesses, and help support financial inclusion.”
A closer look at the banking and payments industry in Brazil reveals the massive leeway for growth available for the right company with the right strategy. Despite being the largest economy in Latin America, Brazil had a very low bank penetration rate until 2018. However, regulatory changes introduced by the Brazilian Central Bank and National Monetary Council two years ago have led to a sharp increase in the number of residents with a bank account. According to JPMorgan analysts, more than 70% of the population now have access to banks, which is an encouraging sign as the success of Facebook, and any other mobile payment solutions provider for that matter, will depend on the number of users with credit or debit cards.
According to data from the Pew Research Center, approximately 40% of the total population in Brazil used a smartphone in 2019, and more than 59% of adults owned a smartphone. In 2018, people in Brazil spent a staggering 90 billion hours on social media platforms, coming second only to India.
Source: App Annie/PagBrasil
According to a report published by App Annie, below are the five most popular social media and communications applications in the country based on the number of hours spent on each of these platforms.
- Messenger
- Uber
Not surprisingly, the top four positions are secured by Facebook and other applications owned by the company, which goes on to exhibit the strong footprint of the social media giant in Brazil.
The improving internet and bank penetration rate have led to the growth of the e-commerce industry in the country over the last few years. According to data from Statista, Brazil is the 15th largest player in the global e-commerce industry and generated revenue in excess of $15 billion in 2019, well ahead of many European nations such as the Netherlands. However, online sales still account for just 4.8% of total retail sales in the country. There is massive room for improvement from this front along with the digitization initiatives launched by the government in the last couple of years. Data from JPMorgan reveals mobile payments accounted for over 30% of the total e-commerce transactions in 2019.
Source: Statista
The growth of the industry will naturally result in a higher dollar amount passing through mobile payment gateways. Research And Markets, a market researcher based in Ireland, predicts this segment to grow at a compounded annual growth rate of 16.2% through 2025 to reach a value of $151 billion.
Based on these developments, it seems reasonable to conclude that the outlook for the payment industry in Brazil is positive. Facebook is trying to capitalize on its strong presence in the country to generate an additional revenue stream through commissions charged from transactions executed on its newly launched WhatsApp Pay platform.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Facebook’s competitive advantages” data-reactid=”69″>Facebook’s competitive advantages
Samsung Pay accounted for the highest market share in the mobile payment industry in Brazil with a 6.5% take in 2019. Mercado Pago followed closely with a 4.5% share of the market and Google Pay was the third-largest player. These numbers reveal that the industry is highly fragmented, and this presents an opportunity for a large-scale company to quickly disrupt this market by eating into the business controlled by a competitor. Facebook, as the most popular social media platform in the world and Brazil, might not take long to consolidate its position in the payment industry by offering best-in-class service to its consumers.
The massive installed base of over 120 million for WhatsApp will help the new service gain traction in a short time as well. As per company executives, users would be able to send payments to a friend by just a click of a button and at a zero cost, whereas business customers will be charged a fee that is yet to be disclosed.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Takeaway” data-reactid=”72″>Takeaway
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="In an article published on May 20, I concluded that Facebook shares could have more upside based on three major reasons.” data-reactid=”73″>In an article published on May 20, I concluded that Facebook shares could have more upside based on three major reasons.
- The investment in Jio that helps the company monetize WhatsApp.
- The launch of Facebook Shops in a bid to capture a share of the booming e-commerce industry
- The rollout of Messenger Rooms, which facilitates video conferencing.
With the latest developments in Brazil, the company is likely to generate income from WhatsApp sooner than my initial estimates. This positive move warrants a revision to the model I use to calculate Facebook’s intrinsic value. By increasing the expected revenue growth rate by a few basis points, I arrived at a fair value estimate of $321 per share, which represents an upside of 38% from the market price of around $232 on June 15 (this is an upgrade from the $312 per share I assigned the stock on May 20).
What Facebook is starting in Brazil will not be limited to just Latin America. India is likely to become the next country to launch WhatsApp Pay on a national level, and many other countries could follow. Therefore, the positive impact on earnings could extend into multi-billion dollars in the next five years.
Disclosure: I own shares of Facebook.
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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="This article first appeared on GuruFocus.
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