Facebook Inc. (FB, Financial) is engaged in building products to create utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about. Developers can use the Facebook Platform to build applications and Websites that integrate with Facebook to reach its global network of users and to build personalized and social products.
Facebook, the world's No.1 social network with 1.2 billion users, generates the majority of its revenue by showing ads that target users by age, gender and other traits.
Performance Analysis
Today, Facebook makes $7.62 a year from a user, so 10% more amounts to $8.38. Facebook increased its core user base by 170 million users in 2013. Assuming growth will slow down, and 150 million new users will sign up in 2014 and 120 million in 2015, Facebook will end 2015 with about 1.55 billion monthly active users. The increase in revenue/user, $0.76, will result in an increase of $1.1 billion per year in revenues. Facebook's net margin is approximately 20%, so that comes to $236 million of net income a year.
FB’s shares have risen by roughly 30% in 2014 alone, further dispelling investor concerns that had plagued the stock in 2012. The growing digital advertising market, the increasing share of mobile in the mix, the attractive return on investment for businesses advertising on Facebook, and the company’s investments in optimizing its ad strategy are some of the factors that have fueled its increased valuation.
More than 25 million small businesses advertise on Facebook now. As a result, the company has registered a massive increase in its average ad pricing in recent quarters. In fourth quarter 2013, the figure demonstrated year-over-year growth of 92%. These factors will continue to drive Facebook’s share of the overall digital advertising market.
Instagram Acquisition
Buying Instagram improves Facebook's mobile offerings while removing a rival for users' attention. Instagram, with more than 30 million registered users, grew rapidly by helping people share photos, a fundamental reason people use Facebook. Instagram is one of a cohort of young start-ups that have built products around the iPhone and have registered incredibly fast growth in a short period of time.
Over the past three years Instagram has grown tremendously with more than 150 million people capturing and sharing the world's moments. In just three years, the company grew its monthly active user base at a CAGR of 287% from 10 million in 2011 to 150 million in 2013 thanks to the success of smartphones and easy access for high speed Internet.
Growing Trend
Facebook has a vast array of growth opportunities that have yet to be rolled out or even discovered. Specifically, in the near term, the company will roll out video advertisements for U.S. users, which can be rolled out internationally over the coming years.
Facebook currently has huge investment plans, which include maintaining data servers to keep up with a growing user base. The company has already spent $595 million in 2013. In the short term this can lower margins, but an increased investment is a positive aspect as the company continues to expand internationally and gain new users.
Winning Hearts with the Watsapp Deal
Facebook’s $19 billion acquisition of messaging service WhatsApp, announced last month, is one of many signs of large businesses’ insatiable appetite for customer data and better reach. Facebook says that WhatsApp, like Instagram, will remain largely independent from the social network. The acquisition positions the company for even stronger growth on mobile phones, where advertising now makes up the majority of its revenue. It also strengthens its toehold in China: Facebook is blocked in the world’s largest Internet market; WhatsApp and Instagram are permitted to operate there.
Combining text messaging and social networking, messaging apps provide a quick way for smartphone users to trade everything from brief texts to flirtatious pictures to YouTube clips — bypassing the need to pay wireless carriers for messaging services. And it helps FB tap teens who will eschew the mainstream social networks and prefer WhatsApp and rivals such as Line and WeChat, which have exploded in size as mobile messaging takes off.
Facebook co-founder and CEO Mark Zuckerberg, WhatsApp is adding about a million users per day. "WhatsApp will complement our existing chat and messaging services to provide new tools for our community," he wrote on his Facebook page. "Since WhatsApp and (Facebook) Messenger serve such different and important users, we will continue investing in both." Smartphone-based messaging apps are now sweeping across North America, Asia and Europe.
The agreement also provides for an additional $3 billion in restricted stock, to be granted to WhatsApp's founders and employees, that will vest over four years once the deal closes. Facebook said it would keep WhatsApp as a separate service, just as it did with Instagram, which it bought for about $715.3 million. The social media giant also said WhatsApp co-founder and CEO Jan Koum would join Facebook's board.
On a Concluding Note
Facebook has more than 1 billion users, and is still growing this tally above 20% year over year. The massive amount of data that the company has already collected (and will continue to collect) from the billion plus users will be an extremely valuable asset that can be utilized in various ways to generate revenue. The future remains bright for Facebook and another major catalyst for the stock can be the company's inclusion within the S&P 500 index. The company fits the guidelines for inclusion as Facebook is a well established leader within the advertising space.
FB's acumen for remaining ahead of the curve in evolving its platform, shrewd acquisitions, and using acquisitions to commercialize and evolve its platform make it the market leader. From a relative value point of view the stock has more upside when compared to similar but not as well positioned stocks.
