News Feed: How Facebook’s Business Trended During 2014

Facebook (NASDAQ:FB), a ubiquitous social media platform used by almost all netizens to stay in touch with their peers and family, recorded a successful year in 2014, with both its business fundamentals and stock price surging during the year. In this article, we assess how its major business indicators played out during the soon-to-be-outgoing year, along with the key points to be taken into consideration going into 2015. We have also captured the gist of our findings in a crisp info-graphic, to make our findings easily digestible.

Facebook’s results during the year should bring cheer to its investors — while its top-line grew by over 60%, its GAAP-operating margin also expanded by 1300 basis points annually to reach 45% during the nine months ended September 2014. Cumulatively, this resulted in more than 200% year-over-year expansion in both its GAAP and non-GAAP diluted earnings per share (EPS) during this nine month period. These results were lauded by market participants, resulting in over 40% increase in its stock price since the beginning of 2014. FB’s stock now trades at more than 50% premium to its 52-week low of around $52.

We are bullish on the company’s growth prospects in the coming years. Increased relevance of advertising on FB’s core platform, due to better and more targeted ad products, will drive the company’s results, both across the developed markets and developing markets where it’s still under-penetrated. Additionally, Facebook’s investments on other platforms such as Messenger, Instagram, WhatsApp, Search and Oculus, could add significantly to the revenue stream starting 2015. These businesses have the potential to become huge in the long-run, and the company hasn’t even begun scratching the surface of this potential.

An area to watch out for investors in 2015 is the expected slowdown in revenue growth, coupled with planned acceleration in spending. Recently, FB’s management estimated that expenses will rise substantially during 2015. Together with the expected slowdown in revenue growth, owing to tougher year-over-year comparisons, this will result in margin decline during the next year. We’d advise investors to watch closely for these trends, as any shift against market expectations could cause a swing in FB’ stock price in either direction.

See our complete analysis for Facebook

Most Of The Major Financials Soared During 2014

Facebook’s monetization surged during 2014, with the increasing maturity of the company’s business model. The number of ad impressions declined by 32% during the nine months ended September 2014, due to the ongoing shift towards mobile usage and News Feed ads. But the average price per ad impression rose significantly by 150% during the same period, buttressed by higher prominence of ads, better targeting, and larger number of marketers on the platform. We expect the same trend to continue in 2015 as well, albeit at narrower rates.

We find these results impressive, considering FB’s user base and mobile business also strengthened during the year. It added 122 million new monthly active customers during the first nine months of 2014, with mobile MAU’ rising from 945 million at the end of 2013 to 1,120 million at the end of September 2014. Consequently, mobile now accounts for around 70% of its advertising business (as per our estimate), compared to around 53% at the end of last year.

Expectations Are High For The Coming Year As Well

Facebook’s growth prospects look exciting to us in 2015. We expect its core platform will continue to see an uptrend in monetization, driven by better and more targeted advertising, a rise in international ARPU, and newer ad products.  The other businesses  look even more alluring considering they could start contributing significantly to FB’s overall revenue starting next year. Recently, Citigroup valued Instagram at $35 billion, which represents a valuation even greater than Twitter’s near-$24 billion market cap. ^[1]

We believe this is just the beginning and in the next year, we could also see unlocking of value in other businesses such as WhatsApp, Search and Messenger. Put together, all these moving parts will continue to fuel the company’s top-line growth for years to come.

However, Slowdown In Growth Along With Acceleration In Spending Could Spoil FB’s Party In 2015

Despite this long-term positive outlook, Facebook could face near-term challenges.  Recently, the company’s management pegged top-line growth in the fourth quarter of 2014 at around 40-47%, which represented a slowdown compared to 60% growth levels seen during Q2 and Q3. Not only this, it also guided to an expense increase of 65% and 60% (at the mid-point) in GAAP and non-GAAP terms respectively during 2015. Overall, this means that we could see margin erosion in FB’s business during the coming year.

While this may seem troubling on the surface, we’d like to remind investors that Facebook is one company that has been highly successful in turning its investments into gold over the past few years. Taking into light, the recent $35 billion valuation of Instagram (by Citigroup), which was acquired for $1 billion, we think the company is still sowing the seeds for its rapid long-term growth. Owing to the rapidly changing competitive environment in the social networking market and growing threat from newer mobile apps, we think Facebook is making the right maneuvers in stepping up its investments on growth strategies.

We are in the process of revisiting our $64 price estimate for Facebook’s stock.

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1. Instagram is worth $35 billion, according to Citigroup, Mashable, December 20, 2014 [↩]