Acquisitions To Drive Facebook Earnings Growth

  • Users are spending more time on social networks in general with Facebook being one of them.
  • Facebook has much better engagement when compared to other social applications leading to robust revenue growth; Moreover, regional trends indicate that Europe may be a bright spot for future growth.
  • Facebook’s combined efforts to boost monetization, through acquisitions and pricing increases, should lead to further earnings surprises in the immediate future.
Acquisitions to drive Facebook future valuations

Facebook (NASDAQ:FB) has shown that its efforts to create a better, more refined user experience can result in better returns for investors over time. How this is reflected is in user gains, increases in time spent on the website, and increased click-through-rates. The combined outcome has been a record setting year for Facebook, as the stock has continued to climb in value despite the occasional hiccup due to market volatility.

Average time spent per day on Facebook

In this study by eMarketer, Facebook has been able to increase the time spent by users on the website. However, alternative social networks have been able to gain the attention of users as well. So as a percent share of time spent when compared to other social networks, Facebook has declined.

However, Facebook also owns other social networking properties like Facebook messenger, Instagram, and WhatsApp. With other applications entering into the space, Facebook has had an equally powerful strategy with respect to apps: buy, build, and unbundle.

Facebook hasn’t had as much success with creating its own applications (remember slingshot?). However, unbundling the messenger by creating a separate messenger app seems to have worked out as Facebook has a large installed base between WhatsApp (650 million users) and Facebook Messenger (200 million+ users). Furthermore, acquiring successful applications like Instagram and WhatsApp gives the company a larger percentage share of the total time spent on social applications.

App engagement
Source: Statista

25 social applications are launched every month. However, the average session length is 2.5 minutes, and it’s likely that users spend the lion’s share of their time on Facebook (in the earlier chart, the average Facebook user uses Facebook 39 minutes per day). Facebook is way ahead of the pack in terms of audience engagement, which reinforces the likelihood of continued revenue and earnings growth. So while there’s nothing really restricting application developers from creating a Facebook like application, the success rate is extremely low, which reinforces the durable advantage of Facebook.

Facebook revenue by geography
Source: Facebook

Based on historical measures, Facebook’s ad-business has been growing at a fairly rapid pace. This is likely to continue as Facebook isn’t just building and buying more applications. The company is also improving the return on investment for marketers by supplying better analytics tools, and through partnership with various ad-agencies. This translates into more buyers, and more buyers will drive the average pricing for ads.

Facebook’s improving monetization metrics may become more apparent in Europe as the y-o-y revenue growth in its European segment in Q2 was 62%. Comparatively revenue growth in North America was 54% year-over-year. It’s likely that Europe will catch up to North America, as the difference in growth rates between Europe and America will widen.

Facebook may have further upside than what the consensus analyst estimates indicate for FY 2015. Predictions made further out beyond a year are often inaccurate, and given the robust growth in Facebook’s other mobile applications, and heightened demand for ads, it wouldn’t be surprising to see a continued trend in earnings beats going forward. Also, Facebook’s durable advantage looks well established, as Facebook has much better engagement when compared to other social applications.

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