Apps, Mobile Monetization To Drive Facebook Valuation

  • Facebook has consciously been unbundling the features of the Facebook platform.
  • The unbundled features have been optimized into apps to engage users on the mobile platform.
  • The unbundling of services into different mobile apps and Facebook’s mobile monetization abilities will drive future topline growth at Facebook.

Facebook strategy to unbundle and monetize

Facebook’s (NASDAQ:FB) acquisition of WhatsApp seemed a random move at first, but a careful thought brings out a clear strategy at play at the largest social network of our times. To understand the strategy from the management’s perspective, we revisit Facebook’s Q1 2014 earnings call transcript.

Facebook: Strategy of unbundling the Facebook platform

Mark Zuckerberg said in the Q1 2014 earnings call

Our strategy for connecting everyone is based on two approaches. The first is about giving people new apps for sharing different kinds of content with different people.

The longer term part of our strategy for connecting everyone is focused on Internet.org, our effort to make affordable basic Internet services available to the entire world.

We shall for today focus on the first part of Facebook’s strategy. In short, what Facebook is focussing on is unbundling the various features of its once PC major platform and making the services available in the form of apps to deliver it onto the mobile platform. The chat on the PC is slowly but steadily being forgotten and replaced by Facebook Messenger on the mobile. The photo sharing and albums creation has been shifting more to the Instagram platform with cross platform sharing with the Facebook core platform. And with the recent acquisition of Whatsapp, Facebook has got a presence in your life that is high on engagement.

Zuckerberg went on to elaborate his strategy of having a pipeline of apps which were at different stages of maturity, with the core Facebook app, with over 1 billion users ripe for monetization. Monetization isn’t Facebook’s immediate goal with respect to Whatsapp, messenger and Instagram. However, the growth of each of these has been nothing short of spectacular. The table below displays the current monthly active users (MAU’s) on each of Facebook owned services/apps.

Platform/service

MAU's (in millions)

Facebook

1200

Messenger

200

WhatsApp

500

Instagram

200

An upcoming product is rumored to be ‘Slingshot’, Facebook’s in-house developed app to take on Snapchat, who famously rejected a $3 billion buyout offer from Facebook. Facebook is slowly and securely attempting to establish itself at the center of online communication, with a combination strategy of in-house developed as well as acquired products. The next bit of the strategy is to scale each of these to levels where they are extremely valuable. For eg: Instagram, acquired by Facebook in 2012, reportedly had a zero revenue model with fewer than 22 million MAU’s at the time of its acquisition. Today, Instagram has become a 200 million strong platform, expected to pull in close to $250 - $400 million in revenues this year.

Mobile monetization a key to future growth

Mobile monetization is one area which has been a game changer for Facebook. The company reportedly had negligible mobile revenue at the beginning of 2012. In a matter of two years, the company has seen its mobile revenue surge to 59% of the total ad revenue in Q1 2014. The fact that all of Facebook’s acquired and newly developed apps are mobile focussed further the importance of an effective mobile monetization strategy. Though it will be a while before we are looking at monetization of WhatsApp and messenger, effective monetization of mobile users should comfort Facebook investors of the company’s ability to extract value from its largely mobile focussed set of apps.

The management strategy of nurturing and developing a pipeline of apps to a huge scale and then leveraging the size and mobile monetization abilities will drive Facebook revenue over the coming quarters. However, given the current expectations of growth priced into Facebook stock, the FB stock presents an attractive investment option to a growth investor. Value investors will continue to stay away at valuation multiples like price-to-earnings multiple of 86 and price-to-sales multiple of 18. We continue to reiterate our hold rating on Facebook stock. View our Facebook stock analysis.

To see Facebook’s latest stock price movement, click here (NASDAQ:FB)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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