Facebook (NASDAQ:FB) has increased its active user base and average revenue per user (ARPU) substantially over the past few years, thanks to international expansion and a significant improvement in its advertising business. The total number of monthly active users jumped from 145 million at the end of 2008 to 1,056 million at the end of 2012, and currently stands at around 1,150 million.  However, the ARPU hasn’t grown much and has fluctuated due to the impact of seasonality in advertising and Facebook’s aggressive expansion on the undermonetized mobile platform. Nevertheless, there is still room to grow, especially in international markets.
The revenue contribution of the U.S. has declined from 62% in 2010 to 51% in 2012, which primarily reflects Facebook’s strong active user base growth outside the country.  As this growth slows down, the next logical step is to focus on improving its international ARPU which still falls significantly behind that of the U.S. While it is unrealistic to think that the two figures will converge in the near term, there is still an opportunity to narrow the gap. Facebook can leverage the growing economies of Asia and the Middle East, and push ad sales in Europe which appears to be coming out of the recession. If the ARPU for international markets reaches $1.87, which is same as Europe’s ARPU for the latest quarter, there can be a massive 30-40% upside to our current price estimate.
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Facebook’s Growth In International Markets
Facebook’s international monthly active users jumped from 248 million at the end of 2009 to 863 million at the end of 2012.  Despite the fact that international markets account for more than 80% of Facebook’s active user base, they constitute less than 50% of its total revenues due to low monetization. In Q2 2013, while ARPU for the U.S. and Canada stood at $4.32, the same figure totaled $1.87, $0.75 and $0.63 for Europe, Asia and Rest of the World respectively.  The chart below shows the trend in ARPU for different regions, and it appears that the gap between the figures for the U.S. and international markets has widened. We believe that this may be due to Facebook’s ramp-up of mobile advertising which has garnered immense success domestically, where several marketers including Wal-Mart (NYSE:WMT) have launched their marketing campaigns on Facebook’s mobile platform. Over time, we expect this gap to narrow.
Average Revenue Per User (Source: Facebook’s SEC Filings)
During the second quarter of 2013 , global ARPU stood at $1.60, registering 25% growth over the same period last year.  In comparison, U.S. ARPU growth was 30% which indicates that Facebook expanded rapidly in areas with lower ARPU. It is highly likely that the user growth will continue to be high in these markets, and overall ARPU may increase at a slower rate. However, going forward, the company has an opportunity to improve ad pricing and sell more ads in international markets as the global economy recovers, the quality and quantity of data generated by international users increases, and e-commerce sees greater adoption.
What Is The Opportunity Over The Long Term?
Given the 2.4 billion Internet users globally and the huge gap between the company’s monetization levels in the U.S. and international markets, there is a significant opportunity for Facebook to grow. In the event where Facebook’s international ARPU reaches $1.87, which was same as Europe’s in Q2 2013, the company will earn $3.2 billion in incremental annual revenues. That’s a huge figure in the context of Facebook’s expected total revenues of close to $6.7 billion for 2013. Incremental revenues of $3.2 billion will generate $1.5 billion in annual EBITDA (earnings before interest, taxes, depreciation and amortization) implying upside of about 30-40% to our current price estimate. This will add more than $25 billion to Facebook’s value.
But is this achievable? It may be difficult in the near term but over the next 5-6 years, Facebook could drive its international ARPU supported by video ads, ad pricing increases and higher ad sales.
Our price estimate for Facebook stands at $30, implying a discount of about 30% to the market price.Notes: