Facebook Mid Year Review: Stock Up 40% In Last Year On Robust Ad Revenues, User Growth

Facebook‘s (NASDAQ:FB) stock is up about 20% year-to-date (YTD) and 40% in the last year following solid first and second quarter results. The company significantly outperformed expectations in the first six months of 2016, in terms of both financial and engagement metrics. Facebook registered 56% growth in revenue to over $11.8 billion in the first six months of 2016 over the same period last year, driven by solid growth in advertising. Operating income more than doubled to about $4.8 billion and the company’s operating margin improved from 29% in the first half of 2015 to 40% in the first half of 2016. This helped Facebook post extraordinary 184% year-over-year (y-o-y) earnings growth in the period to $1.25 a share.

In this note, we discuss Facebook’s performance in the last six months and its areas of potential growth for the near future.

• Advertising Revenue Growth: Advertising, Facebook’s primary source of revenue, grew 60% to over $11.4 billion in the first half of 2016 driven by growth in mobile ad revenues across geographies. Mobile ad revenues contributed 83% of total advertising revenues, up from 74% in the same period last year. Mobile ad revenues grew both because of an increase in frequency of ads shown in News Feed and the price per ad. The average price per ad increased 7% and total ad impressions rose 50% in the first six months of 2016 over the same period last year.
• Monthly Active Users: There was 15% y-o-y growth in Facebook’s monthly active users (MAUs) to 1.71 billion at the end of June 2016. This translates into an average of 1.68 billion users accessing Facebook at least once every month for the first six months of this year. To put this in perspective, this means that about 23% of the world’s population logs in to Facebook on a monthly basis. This ratio varies from about 62% in the U.S. and Canada to 12% in the Asia-Pacific region. Facebook’s monthly active user base remained strong across all platforms, including Instagram, WhatsApp and Messenger. At the end of June 2016, the number of MAUs on Instagram, WhatsApp and Messenger were 500+ million, 1+ billion and 1+ billion, respectively.

• Free Cash Flow Growth: One of the impressive things about Facebook’s business model is its ability to increase free cash flows faster than its top line. Despite a doubling of capital investments over the same period in 2015, Facebook’s free cash flows increased 60% y-o-y in the first half of 2016. This should help the company continue to make investments into newer areas such as its internet.org venture, virtual reality, augmented reality and artificial intelligence. 

Areas Of Potential Growth

• International Markets: 87% of Facebook’s users are outside North America but they contribute only about 50% of the company’s total revenues. If we exclude the relatively mature European market, 66% of Facebook’s users in Asia-Pacific and rest of the world contribute just 25% of the company’s revenues. This can also be gauged from the fact that the average revenue per user (ARPU) in the Rest of the World region was only $1.13 in Q2 2016 compared to $14.34 in North America. This presents a huge opportunity of growth for the social media giant and this metric is bound to improve going forward, as internet connectivity and smartphone usage increases in these regions and digital marketing gains acceptance over traditional advertising channels. 
                                             

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