Facebook Delivers Strong Q3 Results On The Back Of Mobile Growth

Facebook (NASDAQ:FB) outperformed expectations during the third quarter of 2015, both in terms of financial and engagement metrics. Its monthly active user base rose at a healthy pace on all platforms, including Instagram, WhatsApp and Messenger. Moreover, the company reported a surge in daily video views, which have now risen to over 8 billion. These results are encouraging, and we expect that Facebook will continue to account for a larger share of the rapidly-growing digital advertising market in the coming future. This is because the company’s product offerings have become highly popular with businesses of all sizes. In addition, Facebook’s long-term outlook looks strong, on the back of strong monetization opportunities on several platforms as well as inroads into new areas such as virtual reality.

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Ad Business Growth Driven By Mobile Usage, Ad Pricing

Facebook continued to see a healthy increase in engagement metrics during the third quarter, as its monthly active user (MAU) base grew by 14% annually to 1.55 billion. Additionally, the company’s average daily active user base was over a billion during September. Simutaneously, its advertising revenues rose by 45% and 57% in dollar and currency-neutral terms, respectively, during the third quarter.

The mobile platform accounted for a bulk of the growth, as MAUs increased by 23% year-over-year to 1.39 billion. Mobile advertising revenue surged by 73% annually to comprise 78% of the overall advertising business in Q3. In contrast, the PC advertising business declined by 8%. ^[1] Owing to the secular shift towards mobile advertising, and rapid growth in advertising on Instagram, we believe the share of mobile in Facebook’s overall ad business will increase to nearly 90% by 2016.

In terms of the breakup between ad pricing and ad engagements — the 61% rise in average ad pricing was mainly responsible for the rise in the advertising business, as ad engagements fell by 10% annually during Q3. These price-volume dynamics were driven by a redesign in the right-hand column and the shift towards mobile usage. In the coming quarters, we expect both ad engagements as well as ad pricing to improve. In sequential terms, average ad pricing and ad impressions strengthened by 5% and 7%, respectively, during Q3.

Long-Term Potential Looks Solid

Rapid growth in video consumption represents a tailwind for Facebook’s business — video views have now increased to over 8 billion daily, as compared to 4 billion at the end of first quarter. More than 500 million people watch videos daily on Facebook, and more than 1.5 billion small businesses use videos to promote their pages (as of September 2015). This drastic surge in video consumption should help shift a portion of TV ad budgets to Facebook, and will lead to increased ad pricing on the platform.

Engagement growth on Instagram, WhatsApp and Messenger  — where MAUs recently increased to over 400 million, 900 million and 700 million, respectively – also add to the company’s long-term outlook. In addition, virtual reality represents another area of long-term growth for Facebook, as the company is expected to start rolling out VR headsets early next year. With all of these promising growth areas, we expect Facebook’s top line to rise at a robust pace over our forecast period (which spans until 2022).

We are in the process of revising our $102 price estimate for Facebook’s stock.

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1. Facebook (FB) Mark Elliot Zuckerberg on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, November 4, 2015 [↩]