Facebook: 2016 In Review

Facebook‘s (NASDAQ:FB) stock is up about 15% year-to-date (YTD) and 18% in the last year following solid results in the first three quarters, negatively impacted by the company’s expectations that revenue growth will likely come down meaningfully going forward. Facebook’s stock was also negatively impacted by the uncovering of several bugs in the company’s page views, instant article views and video views data.

In terms of financial performance and engagement metrics, the company significantly outperformed expectations in the first nine months of 2016. Facebook registered 56% growth in revenue to about $19 billion in the first nine months of 2016 over the same period last year, driven by solid growth in advertising. Operating income more than doubled to about $7.9 billion and the company’s operating margin improved from 30% in the first nine months of 2015 to almost 42% in the first nine months of 2016. This helped Facebook post extraordinary 172% year-over-year (y-o-y) earnings growth in the period to $2.07 a share.

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

• Advertising Revenue Growth: Advertising revenue, Facebook’s primary source of revenue, grew 60% to over $18.2 billion in the first nine months of 2016 driven by growth in mobile ad revenues across geographies. Mobile ad revenues contributed 83% of total advertising revenues, up from 76% 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 nine months of 2016 over the same period last year. Facebook’s management stated in its third quarter earnings call that advertising growth is likely to come down meaningfully in 2017 because the company is going to focus on keeping ad impressions at sustainable levels. Therefore, the next wave of ad revenue growth is expected to come from price per ad and subscriber growth.

• Monthly Active Users: There was 16% y-o-y growth in Facebook’s monthly active users (MAUs) to 1.79 billion at the end of September 2016. This translates into an average of 1.72 billion users accessing Facebook at least once every month for the first nine 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 September 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 76% increase in capital investments over the same period in 2015, Facebook’s free cash flows increased 66% y-o-y in the first three quarters 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 less than 50% of the company’s total revenues. If we exclude the relatively mature European market, 68% of Facebook’s users in Asia-Pacific and rest of the world contribute just 26% 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 $1.21 in Q3 2016 compared to $15.65 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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