NEW YORK (TheStreet) –– Even as Facebook (FB) has grown to over 1.3 billion monthly-active users, the world's largest social platform has an enormous opportunity in China, the world's largest Internet market, a market where it currently doesn't have much of a presence.
Goldman Sachs analyst Heather Bellini, who rates Facebook a buy with a 12-month price target of $85, is betting on the China story. Bellini says that Facebook, which recently opened a sales office in China, could generate an additional $10 billion in revenue and $1.18 in non-GAAP earnings per share over a five year period if the company can enter the country in force by 2017 with the goal of capturing 20% of its market by 2021.
"In our view, China presents a strong expansion opportunity for FB which is not in our forecasts but, based on our analysis, could translate into upside to our numbers, even if we assume what we view as conservative potential penetration rates," Bellini wrote in the note.
Earlier this year, Facebook stated that it was exploring plans to have support for Chinese businesses even more locally, by potentially opening an office in mainland China.
"Chinese exporters and developers are finding Facebook is an excellent way for them to reach customers outside China," the company announced in a May e-mail. "Today, our sales team in Hong Kong is supporting these Chinese businesses, but because of the rapid growth these businesses are achieving by using Facebook, we are of course exploring ways that we can provide even more support locally and may consider having a sales office in China in the future."
On Facebook's second quarter earnings call, COO Sheryl Sandberg, who has met with various Chinese officials, noted that the company's mission is "to enable everyone in the world to share and connect." She noted that the company has been studying and learning about China for a number of years and remains interested, but downplayed a potential entry into the market, noting the company is focused on its export market "for now."
With an Internet population of 698 million at the end of 2013 (according to the World Bank), China's Internet population more than doubles that of the United States and Canada, and the number is likely to surpass 1 billion by 2020, giving Facebook ample room to grow its advertising business. In the second-quarter, Facebook generated $2.91 billion in revenue, with $2.68 billion of that coming from advertising, and $1.66 billion coming from mobile advertising.
Currently, Facebook was accessible in mainland China until the 2009 protests in Xinjiang province; YouTube and Twitter (TWTR) were also taken down. Since then, the popularity of Chinese-based social platforms led by Tencent WeChat and Weibo WB have surged. Tencent is the most visited and used social platform in China, with users spending 212 minutes a month, according to comScore.
Nonetheless, there are assorted ways that China-based Internet users can access Facebook. Chief among them is using a virtual private network, according to a source who lives in China, though Facebook doesn't receive any advertising revenue from these users.
.@Chris_Ciaccia Easy to model $=0 since any ads they see are presented to the location of the VPN host, not China.— Daniel Ernst (@danielhsqr) August 7, 2014
With consumers, both domestic and abroad, increasingly turning towards mobile, Facebook has ample opportunity to generate even more revenue from its mobile initiatives.
"In our view, coupled with the rising purchasing power of the Chinese consumer and the saturation of mature markets, China is becoming an increasingly important market for Facebook to penetrate going forward," Bellini wrote in the note. "The growth of mobile in China will likely be important to Facebook, as the company has shown success and strength in mobile advertising in its more mature regions."
According to Bellini, research firm IDC estimated that China had 420 million mobile Internet users in 2012, headed towards 678 million in 2017. Facebook's Instagram is currently not blocked in China, and neither is WhatsApp, a company Facebook announced its intentions to acquire earlier this year. Both of these services are heavily skewed towards mobile users, and Bellini says these two resources represent the company's near-term focus towards expanding in China, and not the main site.
"Given the availability of WhatsApp and Instagram in China, we see those apps as the most likely ways Facebook will be able to generate revenue," Bellini wrote in the note.
As of the end of March, Instagram surpassed 200 million users and WhatsApp had more than 500 million users, as of the end of April. 2014. With WhatsApp, Bellini says the company could move into QR code advertisements (scanning your phone against a machine for contests, buying products, etc.), as well as other things like flash sales, official accounts and stickers.
When discussing the WhatsApp transaction, Facebook CEO Mark Zuckerberg noted he personally doesn't "think that ads are the right way of monetized messaging services," with WhatsApp CEO Jan Koum echoing those sentiments. "We think that for our product for messaging, advertisement is not going to serve as the right thing to go," Koum said in a Feb. call with analysts, discussing the transaction.
Instagram has recently begun monetizing its service in the United States, having signed a deal with advertising agency Omnicom (OMC). Instagram has recently begun experimenting with app install ads, a type of ad that has worked well for Facebook. By doing both traditional ads on the Instagram platform, as well as app install ads, and a buy button (like the one being experimented with on Facebook), Instagram could help boost Facebook's monetization even further.
Despite all of these potential initiatives, Facebook would need to do what it's done in India (localization) to have any success, according to the analyst.
"All in, we emphasize the importance of localization if Facebook is to have success in China. Although Facebook would be a fairly late entrant into the Chinese social media ecosystem, given its innovation strength in mobile and proven success abroad, we believe Facebook can make inroads in China despite its late entry."
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