When it comes to acquisitions, Facebook (NASDAQ:FB) has been fairly consistent – that is, a focus on consumer apps. Even though there have been some bad deals over the years, the strategy has mostly been a winner. The fact is that the Facebook stock performance would have been much less robust if there had not been deals for properties like Instagram and WhatsApp. They have been game changers.
Yet there is a recent deal that shows a change in the strategy. In November, Facebook agreed to shell out over $1 billion for Kustomer, which is a developer of customer relationship software for businesses. Yes, it’s a play for the enterprise market.
Keep in mind that the deal did not get much buzz – but it should have. Kustomer has the potential for bolstering the Facebook platform but also provide for a recurring revenue stream.
So then, let’s take a deeper look at the acquisition and see how it could impact the Facebook stock performance.
The founders of Kustomer — Brad Birnbaum and Jeremy Suriel – are veterans of Silicon Valley. They have created several companies, including Assistly, and have worked at Salesforce.com (NYSE:CRM).
In 2015, the founders saw an opportunity to build a new kind of customer support platform. It was based on the premise that there would be a megatrend of consumers using social and messaging channels to communicate directly with companies.
The Kustomer software centralizes the communications and provides analytics. The result is that it is much easier for companies to respond to customer needs. There are also built-in workflows to help automate the process, which can be tedious. Some of the customers include Ring, Rent The Runway, Away and Glossier.
The latest funding came in late 2019, when Kustomer raised $60 million in a Series E round from Coatue, Tiger Global Management and Battery Ventures. The total funding since inception was $173.5 million.
Kustomer + Facebook
Interestingly enough, Facebook is not the only social media operator that has made a move into enterprise software. Just look at Snap (NYSE:SNAP). The company recently acquired Voca.ai in November. The startup developer AI (Artificial Intelligence) bots for contact centers.
Now as for Facebook’s deal of Kustomer, it is likely not a play to create a CRM (Customer Relationship) system. Rather, the company will likely seen Salesforce and other companies in this market as partners. But Facebook could leverage Kustomer into a thriving SaaS (Software-as-a-Service) business. The platform could be a nice cross-sell to the existing large base of advertising customers.
It’s also important to note that about 175 million Facebook members use social media and messaging to communicate with companies. This means that there will be advantages to leverage the data for AI and analytics, which should provide even more value for customers. In other words, Facebook has an opportunity to build a sizeable business.
According to a blog post from the company: “Facebook plans to support Kustomer’s operations by providing the resources it needs to scale its business, improve and innovate its product offering, and delight its customers. That way, more people will benefit from customer service that is faster, richer and available whenever and however they need it, whether it’s phone, email, web chat or messaging.”
Bottom Line On The Facebook Stock Performance
So all in all, the Kustomer acquisition makes a lot of sense. There may even be more acquisitions to bolster the business. Although, the impact will take some time.
But in the meantime, the underlying core business for Facebook continues to be strong. And it looks like the new year should see continued growth. Facebook is the must-have for digital advertising.
The stock price is also at a reasonable 25 times forward earnings. Thus, when it comes to the bull case for Facebook stock, it still looks intact — and deals for companies like Kustomer are likely to bolster the long-term growth story.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.