Rapid Rise In Mobile Monetization Drove Facebook’s Q4 Earnings

Facebook (NASDAQ:FB) posted revenue of $3.9 billion in Q4 2014, which represented a year-over-year increase of 49%, and came in slightly ahead of our expectations. However, the top-line growth decelerated as compared to 60% levels seen during the prior two quarters, due to tougher year-over-year comparisons. We think FB’s monetization will continue to rise rapidly in the coming quarters, driven by surge in mobile monetization, better and more targeted ad products, as well as increase in the number of marketers on the platform. A scale up in video-based advertising on both the core platform as well as on Instagram will further push up revenues during the year.

FB’s profitability slipped during the fourth quarter with GAAP operating margin falling to 29% as compared to 44% in the same period a year ago, due to rise in stock-based compensation and marketing expenses. The margins could continue to slip through the year as the company plans to step up its investments in several areas. We believe this strategy could reap huge profits for the company over the next five to ten years, as it could leverage several drivers to bolster its business.  Moreover, FB has not even begun tapping the monetization potential of  several of its platforms and businesses (including WhatsApp, Messenger, Search, etc.), and these could become multi-billion dollar businesses for the company over the long-run.

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Costs Will Accelerate During 2015

Facebook provided more color on its planned investments during 2015 over the earnings call. It indicated that its GAAP expenses would rise in the range of 55% to 70% during the year. And in non-GAAP terms, its expenses could rise by 50% to 65% annually in 2015. Capital expenditure is anticipated to rise from $1.8 billion in 2014 to around $3 billion (at the mid-point) in 2015. ^[1]

While this planned increase in spending may seem troubling, we think the company is taking the right steps in investing heavily in areas such as people, products and infrastructure. There is tremendous opportunity ahead for FB to enhance not only its core-platform business but also its monetization from other platforms. WhatsApp, Messenger, Instagram and Search each have hundreds of millions of active users, and these can become multi-billion dollar businesses for the company in the long-run; FB hasn’t even begun scratching the surface of this potential and hence, these investments could propel top-line growth over the next five to ten years, in our view.

Mobile Platform Will Drive Future Growth

FB’s mobile strategy is turning out to be highly rewarding. During the fourth quarter of 2014, mobile advertising revenue almost doubled annually to comprise 69% of the overall advertising revenue; in comparison, its share was 53% in Q4 2013. Moreover, mobile monthly active users (MAUs) rose by 26% annually in Q4, and comprised over 85% of the total monthly active user base on Facebook.

We believe the rapid increase in mobile monetization will continue to fuel FB’s growth in the coming quarters as well, as the mobile platform is still under-penetrated within brand advertising budgets. Though consumers spend a large portion of their spare time on mobile devices, this platform comprises for only about 5% of the average advertising budget for brands (according to a study by Forrester). ^[2] And this largely stems from the inability of marketers to accurately measure ROI from mobile advertising. Since Facebook is taking various measures to improve its ad relevance and measurement, we believe as mobile advertising gains popularity among advertisers, the company’s monetization could further shoot up. With monthly active users on FB’s mobile platforms – Instagram, Messenger and WhatsApp — surpassing 300 million, 500 million and 700 million, respectively, we believe FB is strongly positioned to gain in the future. ^[1]

The continued shift from desktop to mobile devices, as well as greater proportion of feed-based ads (which are fewer but are more prominent), also positively impacted price volume dynamics during the quarter. Though the overall number of ad impressions fell by 65% during Q4, the average price per ad engagement rose by 335%. We expect this trend to persist in the coming quarters, as the roll-out of better and more targeted ad products will enhance ROI and thereby  push up ad pricing on the platform.

New Ad Products To Spur Revenue Growth, While WhatsApp, Messenger Monetization Could Take Time

Another positive trend that came out during the earnings call is that online video advertising is quickly gaining traction. People are increasingly sharing videos on their newsfeeds, and this has resulted in video views per day on FB increasing to over three billion recently, as compared one billion in September 2014. During the fourth quarter, the company also rolled out auto-play video ads internationally. With more than 65% of video views being seen on mobile devices, this trend will fuel FB’s mobile ad revenues in the future,in our view. ^[1] Facebook recently also starting scaling video ads on Instagram  and, considering this platform has more than 300 monthly active users, we think Instagram could contribute a significant revenue stream in 2015. Note that Instagram users spend around 21 minutes each day on the app (as of Q3 2014).

On the other hand, we think FB’s management will move slowly in monetizing WhatsApp and Messenger during 2015, as it will continue to focus on the user base and engagement growth on these platforms in the near-term. With over 30 billion messages being sent on WhatsApp daily, we believe this has the potential to become a huge business for FB in the long-run, and could likely be monetized through gaming, advertising, or value added services, etc.

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

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1. Facebook’s (FB) CEO Mark Zuckerberg on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha. Jan 28, 2015 [↩] [↩] [↩]
2. Why Do Brands Have Such Small Mobile Advertising Budgets? [Study], ClickZ, September 16, 2014 [↩]