Facebook (NASDAQ:FB) has consistently grown its average revenue per user (ARPU), which is essentially a measure of its monetization. Although we have previously discussed the company’s financial performance in terms of revenue per 1,000 page views (RPM), looking at the ARPU figure makes it easy to compare the business with other ad-based, as well as subscription-based, businesses. The key insight is that Facebook seems to be doing better than some of the subscription-based online audio/video services on a per-user basis, and will likely surpass even Netflix’s (NASDAQ:NFLX) ARPU over the next five to six years. The average annual advertising revenue per monthly active user has increased from $2.68 in 2008 to an estimated $5.70 in 2013, primarily due to the ramp up of mobile advertising. We expect this figure to cross $12 over the next six to seven years, driven by the growth in ad pricing and an increase in the demand from advertisers.
Our price estimate for Facebook stands at $38, implying a discount of about 15%-20% to the market price.
Facebook’s ARPU To Grow In Double Digits Over The Long Term
We expect Facebook’s average annual advertising revenue per monthly active user to grow at a compounded annual growth rate of close to 12% over the next six to seven years. Mobile will continue to be the core of Facebook’s advertising strategy going forward. Approximately three-fourth of the company’s overall monthly active users are also accessing the network through their smartphones and the mobile platform accounted for roughly 49% of its overall ad revenues during Q3 2013.  Mobile represents roughly 12% of consumer media time, but only 3% of the ad budget is directed to this channel.  Both these figures will increase substantially in the future, thus allowing Facebook to leverage the trend and improve its ARPU.
Currently 25 million small business have their company pages on Facebook, and only 1 million of them are active advertisers.  This means that 96% of this potential customer base is untapped. Considering the online advertisement trend, it is inevitable that many of these business will start advertising on Facebook in the coming years, thus giving strong boost to its ARPU.
Hitting Ad Density Ceiling Will Imply Facebook Will Need To Experiment With New Ad Models
Facebook’s growth can materially slow down next year. The company has mentioned that it will not increase the density of news feed ads (ads as a percentage of total news feeds) beyond the current levels.  This essentially implies that future growth will be much more reliant on how the ad pricing trends, which has already gone up substantially. There will be less room for improving the relevance of ads which will result in a slowdown in ad pricing growth. However, this does not mean that the company’s ARPU will not increase. As the user growth saturates, Facebook will continue to focus on refining and developing features to increase user engagement, which will transform into a higher number of page views, and thus more ads. There is also an opportunity to introduce video ads which could command much higher premium. The company could also try introducing a low-investment performance-based ad model wherein the advertisers will pay based on the sales generated through Facebook. This could encourage many of the small business to leverage the company’s platform for advertising purpose.Notes:
- Facebook’s Q3 2013 EarningsTranscript [↩] [↩] [↩]
- Facebook Expands Its Definition Of Small Business Pages, Says It Now Has 25M Of Them, TechCrunch, Nov 18 2013 [↩]