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Facebook Earnings: Here is What You Need to Know!

July 24, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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Almost a couple of years back, Facebook’s (FB) stock nosedived after it launched its IPO, because the shares were overvalued and the employee share lockups had expired. Forward to this day and that particular incident seems to be a one-off occurrence. Just yesterday, Facebook’s share price hit a record high at $75 plus (approximately a 5% increase) on back of a strong Q2 report. In this article, I have tried and covered significant points for investors looking to invest in Facebook.

A strong quarter leads to a record surge

A strong growth in the mobile advertising business led to a jump of around 61% y-o-y in revenue to more than $2.6 billion. As per the management, the monthly active users (MAU) of Facebook on mobile has surpassed the 1 billion figure along with a 200 million+ MAUs on Instagram and Messenger apps. In the quarter, revenue from mobile ads grew a phenomenal 151% year-over-year and now forms approximately 62% of Facebook’s overall revenue. A surge in the number of monthly active users to $1.32 billion reflects the strong prevealance of the social network across the globe. Being a holistic network for socializing, Facebook has garnered a massive and flowery reputation among teens and adolescents resulting in an average revenue growth of 60% across all the major geographies.

Mobile: The growth getter

Facebook is hugely devoted to the growth of mobile and besides the big numbers that testify this fact, it is the initiatives taken by the social giant that inspire further confidence. Recently, the company launched audience network which lets advertisers use Facebook targeting even when extending their ad campaign beyond Facebook. Initiatives like these are designed to help advertisers target their custom audiences both on and off Facebook which is extremely significant from a conversion point of view. It is impressive to see that the company is investing notable efforts in improving its offerings to advertisers.

Besides working on various initiatives for offering a solid ad platform to advertisers, Facebook is also working on strengthening its core apps like Instagram and Messenger. Just last month, the company released one of the biggest updates to Instagram by adding new creative tools that allow people to refine exactly how their photos look and feel. The time Facebook had paid a hefty sum of $1 billion to acquire Instagram, it was criticized by tech pundits for being an overgenerous acquirer and without an adequate strategy on integrating the photo service into its social network. However, like other criticisms, Facebook has negated this one as well with the launch of efficient ads on Instagram that is seeing positive traction.

In line with developing the strength of Facebook’s mobile applications, the company recently hired David Marcus from PayPal in order to lead the messenger business and expand its reaches. Taking my chances at speculation, I believe that Facebook might be looking at a structural or superficial integration of messenger with its newly acquired internet messaging service, Whatsapp. Though the strategy on Whatsapp is still unclear yet an integration with messenger remains a big probability because Facebook would not want to pursue two messaging services optimized for mobile at the same time.

Small businesses but big gains

While mobile is charting a phenomenal growth story for the company, another area of Facebook’s business that is gaining strength is small businesses. As per the earnings call, around 30 million small businesses use Facebook to connect with their customers and more than 1.5 million of them are active marketers. In order to tap the small businesses, the company recently conducted a SMB roundtable in India and also conducts Facebook Fit workshops in various parts of the U.S like New York, Chicago and Miami. The small businesses is a colossal market especially in developing countries like India, Brazil etc and if Facebook can expand its presence in this area by offering a personalized advertising ecosystem then it can create an alternate and sustainable revenue base for the future.

Takeaway

In spite of a solid result, Facebook’s CEO Mark Zuckerberg cautioned the investors not to pin extreme hopes on the growth of apps like Messenger and Whatsapp since they are still ramping up and will take time to be monetized effectively. That aside, it is amply clear that the Facebook’s focus in coming quarters is going to be on mobile as the penetration of smartphones in developing countries takes pace. As per a report from IDC, the worldwide smartphone market grew 28.6% y-o-y in the first quarter of 2014, beating IDC’s estimates by 5.3%. Therefore, there is immense potential that is available to Facebook in the future and being the second biggest player in digital advertising, it has positioned itself well to take leverage of these opportunities.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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