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Facebook: Growing Through Strategic Acquisitions

July 23, 2014 | About:
Faisal Humayun

Faisal Humayun

4 followers

Facebook (FB) has recovered significantly after a rough patch post the IPO. While the company continues to improve its results on a organic basis, Facebook has also been very active with acquisitions. This article discusses some of the recent acquisitions of the company and its impact on the company’s growth.

On July 2, 2014, Facebook announced the acquisition of LiveRail for nearly $400-$500 million. LiveRail is an advertising technology company that helps companies like Major League Baseball, ABC, A&E Networks, Gannett, and Dailymotion serve better ads in the videos that appear on their websites and apps. LiveRail offers a comprehensive platform for online video publishers that help them find and serve the best ads possible.

From Facebook’s perspective, the acquisition gives the company access to video advertising and a big revenue source for the future. LiveRail currently helps over 200 companies sell their video inventory and this opens up a significant market for Facebook.

Facebook can now increase its video advertising revenues through the LiveRail channel and with Facebook having much higher financial resources, LiveRail will grow at a stronger pace after the acquisition. Currently, it is estimates that LiveRail targets nearly 7 billion video advertisements per month. This number is likely to increase with the acquisition and therefore the likely revenue inflow from the acquisition will be significant.

In March 2014, Facebook had also announced the acquisition of Oculus for a consideration of $2 billion, which included $400 million in cash and 23.1 million Facebook common shares. The acquisition was closed on July 22, 2014 and is yet another attractive acquisition when it comes to future revenue potential from the acquired entity.

Oculus is the leader in immersive virtual reality technology and has already built strong interest among developers, having received more than 75,000 orders for development kits for the company's virtual reality headset, the Oculus Rift.

The use of the technology beyond gaming is in its nascent stages with several industries are already experimenting with the technology. Facebook plans to extend Oculus's existing advantage in gaming to new verticals, including communications, media and entertainment, education and other areas.

Once this happens, the company’s growth can be substantial from the technology. Both these acquisitions make it clear that Facebook is hunting for high growth segments of business along with businesses that have new technologies and can bring in very robust growth if the technologies are accepted in the markets.

While these acquisitions will provide benefits in the next few quarters and years, Facebook has also been growing well on an organic basis. For 1Q14, the company’s revenue increased by 72% to $2.5 billion and the company’s net profit increased by 193% to $642 million.

Facebook currently trades at a trailing twelve month PE of 89.8, but investors would not mind the rich valuation if the company continues to exhibit growth as witnessed in 1Q14. Strong growth is likely, especially with the acquisition of LiveRail, which has been growing at a strong pace. Also, if Oculus’s technology goes beyond gaming, the revenue from the acquisition will be substantial. I will still wait longer to see if Facebook can monetize WhatsApp more effectively than expected, and surprise the markets.

Facebook is also expected to announce its second quarter results today and I expect the results to be strong and there might be some positive action in the stock. During the World Cup, Facebook topped a billion interactions and it remains to be seen if increased customer engagement had any positive impact on the company’s results.

Another important factor to watch out in the results will be the revenue growth from mobile devices. Facebook has been introducing several mobile advertisement monetization strategies in the recent past and the results will be a test of how successful Facebook has been with mobile devices.

In conclusion, Facebook has been making the right moves with several acquisitions in 2014. It remains to be seen how the acquisitions impact the company’s growth. In the near-term, I am most bullish on LiveRail followed by Oculus. WhatsApp has been generating revenue of 99 cents per user per year, but that is still not so significant to drive growth. Advertisement success on mobile devices and introduction of new technology remains the key to Facebook’s success.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

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