Facebook (FB, Financial) is one of the largest social media companies today. Its fourth quarter and full-year 2016 performance proves the company has a focused approach and a lot to offer shareholders.
Business overview
Jim Cramer, host of CNBC's "Mad Money," believes selling Facebook is a mistake. He crowned Facebook as the greatest business model and dares investors to sell it.
Facebook strives to connect people around the world. With a clear mission to give people the power to make the world more open and connected, the company aims to help individuals discover, share and express themselves to their friends and family.
The company has a wide reach with 1.2 billion daily active users. Its wide reach and lack of competition is the key to the company’s success. With greater internet penetration and the acquisitions of WhatsApp and Instagram, Facebook has well positioned itself to be the market leader.
Impressive fourth-quarter results
Facebook’s financials are strong with improving margins and available cash flows. The company's 44% revenue growth in  fiscal 2015 increased to more than 50% in fiscal 2016. The operating margin also increased from 35% in 2015 to 45% in 2016, indicating the operational efficiency is improving and that management is capable of controlling costs.
With no debt on the balance sheet, Facebook has no liquidity issues. Moreover, the company has abundant operating and free cash flow, which can be used to fund capital expenditures and investment requirements. It also gives the company some flexibility to create shareholder wealth.
| Parameters in millions | 2016 | 2015 | 2014 |
| Revenue | $27,638 | $17,928 | $12,466 |
| Revenue growth | 54.2% | 43.8% | Â |
| Operating Income | $12,427 | $6,225 | $4,994 |
| Operating margin | 45.0% | 34.7% | 40.1% |
| EPS | $3.56 | $1.31 | $1.12 |
| EPS growth | 171.8% | 17.0% | Â |
| OCF | $16,108 | $10,320 | $7,326 |
| FCF | $11,617 | $7,797 | $5,495 |
Apart from improving financials, the company’s users are increasing at a robust pace. In 2016, Facebook recorded 1.2 billion daily active users, an increase from 1 billion users in 2015. Mobile daily active users increased to 1.1 billion from 934 million in 2015.
Adding to the company’s growth are Instagram and WhatsApp. In December, Instagram had more than 600 million users. WhatsApp has 1.2 billion monthly active users and more than 50 billion messages are sent every day.
Apart from an increasing user base, the company's geographical spread will allow it the opportunity of further penetrating the Asia-Pacific region. Considering the changing economic conditions and increasing internet accessability in emerging countries, I believe Facebook will sustain in increasing its daily active users in the years to come. As e-commerce continues to develop and expand, advertising revenues are expected to increase, leading to an increase in the average revenue per user.
Video is the next big business
Facebook is expected to begin functioning as a major media player in the years to come. Video will further add to its value.
Facebook currently aims to focus on shorter, premium content. According to founder and CEO Mark Zuckerberg, Facebook will invest heavily in its video business and expects to market its content through an application on set-top boxes. This will help it have a greater reach to engage its users. Additionally, advertising will provide further upside to the business.Hence, I believe video content will be the next big thing for Facebook. Considering the company is a social media platform giant, it will generate significant revenues through advertising.
Conclusion
Facebook's financials are impressive with EPS growth of 171% over the last financial year and an increasing active user base. With greater internet penetration, the company has a chance to grow further. Facebook is a good long-term buy and can be considered attractive at current levels based on its clear vision, business model and bright future.
Disclosure: No position in the stock discussed.
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