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Facebook: Strong Results Will Keep Stock Higher

July 24, 2014 | About:
Faisal Humayun

Faisal Humayun

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I had written on Fecebook (FB) yesterday with a focus on the company’s recent acquisitions and their impact on growth. At the end of the article, I had mentioned that I expect Facebook to report strong results and that mobile advertising growth will be the key to growth. Facebook did meet both these expectations and this article discusses the key points in the company’s strong results.

For the second quarter of 2014, Facebook reported revenue of $2.9 billion, which was 61% higher than 2Q13 revenue of $1.8 billion. During the same period, the company’s GAAP operating margin surged by 1700 basis points to 48% as compared to 31% in the prior year comparable period.

The company’s net income was even more robust with an increase of 138% to $791 million in 2Q14 as compared to $333 million in 2Q13. As a result of expanded margin and higher net income, the company’s EPS surged by 131% to $0.3 in 2Q14 as compared to $0.13 in 2Q13. Therefore, Facebook reported bright set of numbers and the stock is likely to surge today on these results.

Looking into the specifics, the company’s daily active users were 829 million, an increase of 19% y-o-y. However, the company’s mobile daily active users were 654 million, an increase of 39% y-o-y. Mobile monthly active users were 1.07 billion, an increase of 31% y-o-y. This underscores the importance of getting the advertising right on the mobile platform as growth will continue to remain very strong on the mobile platform in terms of usage.

In the advertising segment, revenue from advertising was $2.68 billion, an increase of 67% y-o-y. The most encouraging part is that revenue from mobile advertising represented 62% of the total advertising revenue in the second quarter of 2014 as compared to 41% of the total advertising revenue in the second quarter of 2013. Mobile advertisement revenue has therefore grown by a robust 151% y-o-y. The growth in mobile advertising will be one of the key revenue drivers for Facebook going forward as well.

Given the kind of growth in daily and monthly active users on mobile, I believe that Facebook will certainly continue to focus on the mobile platform revenue optimization. In the company’s conference call, it was stated that people in the United States spend at least 40 minutes in a day using the service, including 5 minutes on mobile.

This is significantly good engagement and needs to be tapped into more effectively. The company also stated in the conference call that they will continue to invest aggressively in mobile platform optimization and that is a positive factor, which will continue to boost the company’s growth.

Another important revenue driver will be video advertisements on the platform. During 2014, the company has introduced premium auto play video advertisements and this helps brands extend their TV investments by combining traditional reach focus campaigns with the company’s targeting ability.

The acquisition of LiveRail is another important step in the video advertising segment and I believe that this segment will act as the next big growth driver for Facebook after mobile advertisements. LiveRail, as a separate entity, had been growing at an aggressive pace and the growth will accelerate on integration with Facebook’s capabilities.

From a financial perspective, the company’s $872 million in free cash flow during the quarter is a big positive besides the stellar growth in top-line and the bottom-line. Facebook has been making big investments in innovation and acquisitions and the significantly high FCF will help the company continue its investment spree and look for attractive acquisition options.

Another important question might be if Facebook can sustain its earnings growth. Currently the stock is trading at roughly 90 times its trailing twelve month earnings. For these valuations to sustain, Facebook should exhibit strong growth over the next few quarters and years.

In terms of revenue, a majority of the company’s growth has come from the developed markets. I believe that tapping into emerging markets effectively will be the next big growth driver for Facebook. China and India alone have a population of 2.5 billion and both countries are growing with increasing Facebook engagement. While Facebook still faces regulatory hurdles in China, India is a good growth market. Easing of concerns on China market opportunity will be a major growth trigger for Facebook.

In conclusion, Facebook has answered critics with strong results and the company is likely to continue growing at a more than decent pace in the next few quarters. Investors need to closely watch the continued development on the mobile platform and the revenue from the video advertisements to have more clarity on the future growth path.

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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