Facebook Inc (FB), Google Inc (GOOG): Buying a Network of Growing Profits

A Double Network

eBay Inc (NASDAQ:EBAY) benefits from the network effect in two separate business lines that interact among each other: both Marketplaces and PayPal are textbook examples of the network effect at work.

Buyers and sellers want to go to the online commerce platform, which guarantees plenty of counterparts, so they attract each other in the search for the best products and prices. Amazon has been outgrowing eBay Inc (NASDAQ:EBAY) due to its aggressive competitive drive over the last years, but eBay Inc (NASDAQ:EBAY) is still the platform of choice for many smaller buyers and sellers.

The same dynamics are at work when it comes to PayPal. Merchants want to accept the payment method, which brings more customers to the business, and customers choose PayPal because it’s widely accepted and trustworthy.

With more than 132 million active accounts, availability in 193 countries and strong brand recognition, PayPal has achieved a level of critical mass that competitors can only envy. This means that PayPal is in a privileged position to continue consolidating as the leading online payments method over the next years by being the first mover in a business with strong network effects.

Bottom Line

The network effect is a very powerful and sustainable source of competitive advantages. It´s also an important driving force behind the success of many of the most remarkable growth stories of our time, so it’s a factor to watch when making investment decisions. Buying a network of growing profits can be a really smart move to make.

The article Buying a Network of Growing Profits originally appeared on Fool.com and is written by Andrés Cardenal.

Andrés Cardenal owns shares of Google. The Motley Fool recommends eBay, Facebook, and Google. The Motley Fool owns shares of eBay, Facebook, and Google. Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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