Facebook’s Latest Filing Adds More Noise, Focus On The Big Picture

Facebook has filed yet another amendment to its S-1 statement before it goes public next month, reportedly on May 17. In the new filing, Facebook has released updated user metrics as well as earnings data for Q1 2012. Its revenue grew to $1.06 billion of revenue, up 45% year-over-year, with a net profit of $205 million. ^[1] While the revenue growth was encouraging, its expenses have risen at a much faster rate leading to concerns on a its profit margins. However, much of the increase in the reported operating expenses in 2012 will be due to share based compensation associated with RSUs following the IPO. We expect the adjusted operating expenses to remain in line with the historical trend.

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User growth continues, albeit at a slower rate

Facebook’s monthly active user base has increased from 845 million users at the end of 2011 to 901 million users by the end of March 2012. While the user growth and engagement levels remain high, it is expected to slow down going forward.

We expect Facebook’s average monthly to reach 2 billion by the end of the forecast period. It is one of the most important determinants of Facebook’s revenue growth, as Facebook’s advertising and virtual transactions business are both dependent on its user base.

Mobile: The key to growth

Facebook also announced that it had passed 500 million mobile monthly active users in April 2012. Given that smartphone and mobile penetration is growing rapidly around the world, mobile usage is what will drive the next phase of user growth and engagement for Facebook. We expect Facebook to focus more on mobile advertising in the coming years, rolling out targeted ad units optimized for mobiles.

Virtual transactions to form a larger piece of the revenue

While Facebook generated nearly 15% of its total revenue from payments and virtual transactions in 2011, they accounted for nearly 18% of its total revenue in Q1 2012. We expect it to account for a larger portion of Facebook’s overall revenue going forward as users start spending higher amounts on virtual transactions.

We currently have a $82 billion valuation for Facebook, which stands nearly 20% below its rumored $100 billion valuation. Text and display ads account for around 75% of its value, while virtual transactions account for 18%. Facebook will compete primarily withGoogle (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO) in the online advertising space.

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1. Facebook S-1 Amendment 4, SEC [↩]