An Update On Facebook’s Businesses

September 18th, 2015 by Trefis Team
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Having recorded more than a billion daily active users and over four billion daily video views on its core platform recently, Facebook (NASDAQ:FB) is seeing encouraging growth in many of its businesses. The WhatsApp platform saw its monthly user base grow to more than 900 million in September 2015. In addition, the company recently expanded its advertising efforts on Instagram across more than 30 international markets. We believe these efforts will lead to an increased share for Facebook in the digital advertising market in the coming years. Moreover, the company’s steps towards virtual reality technology represent a promising future, which could translate into accelerated growth for the company over the next 5-10 years.

See our complete analysis for Facebook

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An Update On Facebook’s Key Businesses

  1. Core Facebook Platform (comprising for around-70% of our valuation): Engagement continues to rise at a healthy pace on the FB platform — recently, the company recorded more than a billion daily active users for the first time, marking a new milestone. In addition, video views were last seen at 4 billion daily as compared to 1 billion in Q3 2014. This makes Facebook second only to Youtube in terms of desktop video views in the U.S., according to comScore. [1] We believe these encouraging statistics will help Facebook capture a larger share of the digital advertising market in key countries such as the U.S.. Also, the rising engagement levels will continue to propel revenue growth over the coming years.
  2. WhatsApp (comprising for around 10% of our valuation): The messaging platform, which was acquired by Facebook last year, has grown tremendously during 2015. In September 2015, the monthly active user count on the platform surpassed 900 million, according to a Facebook post by WhatsApp’s CEO. [2] With its user base now approaching one billion, we are keen to see how the company will step up monetization from the service. While we expect the company to be initially slow in monetizing the service, over the coming years we forecast WhatsApp to contribute significantly to the company’s revenue stream. We believe there can be several possible routes to monetization on this platform including value added services, B2C marketing, and paid voice services.
  3. Instagram (comprising for around 10% of our valuation): Facebook is becoming increasingly serious about making money off the popular photo-sharing app. Recently, advertising was rolled out across this platform in 30 international markets (along with a self-service option), with more expansion planned in the future. [3] We expect advertising to become popular among brands on the platform, owing to its creative features, along with its high click-through rates. We believe Instagram will start contributing significantly to the overall revenue stream going forward.
  4. Oculus: Apart from the above measures, Facebook is also preparing for long-term growth with its inroads into the virtual reality technology space. While text updates were the initial mode of communication on social networks, it was followed by photos and then by videos. Over the long run, this trend could move towards VR stories that provide an immersive experience for users. Not only is Oculus expected to begin rolling out VR headsets early next year, Facebook is also reportedly working towards a mobile app that would allow consumers to see 360 degree spherical videos, by tilting their phones through different angles. ((Facebook (FB) To Build Virtual Reality Mobile App For 360-Degree, Spherical Videos: Report, International Business Times, September 14, 2015)) This move towards VR technology should drive substantial growth for Facebook over a longer time frame.

Our $102 price estimate for Facebook’s stock, represents near-10% premium to the current market price. Based on this update, we have kept our price estimate for the company’s stock intact, since these results came in line with our expectations.

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Notes:
  1. comScore Releases July 2015 U.S. Desktop Online Video Rankings, comScore, August 21, 2015 [↩]
  2. Facebook Post, September 3, 2015 [↩]
  3. Instagram gets serious about ads, opening platform to all, Fortune, September 9, 2015 [↩]