- Facebook has outgrown its valuations through effective monetization strategies.
- Barron's recently generated a buzz after claiming that Facebook stock could rise by a further 20%.
- What factors will drive Facebook stock higher over the coming months?
Facebook (NASDAQ:FB) stock price has risen steadily over the last one year, gaining over 50% in value. In comparison, the NASDAQ composite is up by a good 16%. However, this pales in comparison to the advances made by Facebook stock (See the chart below). With Barron's recently claiming that the world's leading social media company could rise a further 20%, it is important to understand which key factors are driving the current momentum in the Facebook stock.
Facebook's Effective Monetisation Strategy
Facebook, Inc has effectively executed on its monetization strategy which is reflected in the company's growing operating metrics. CPC and CPM rates and their trends, in combination with the no. of clicks and impressions, are the key metrics which underlie Facebook's growth. However, all of these metrics can be summed up as Facebook's average revenue per user (ARPU).
Facebook has seen a strong growth in its ARPU, which is a proof of the effectiveness of its monetization strategy. With an LTM (Last Twelve Months) ARPU of $13.84, the company has registered an average annual ARPU growth of 30.7% over the last couple of years.
The company has increased ARPU through steady growth in its CPC and CPM rates while also increasing the ad loads over the last few quarters, which essentially increases the number of ads shown to its user base. On the Q2 2016 earnings conference call, David M. Wehner, CFO, Facebook listed rising ad load to be a key factor in the company's recent growth momentum. Quoting from the earnings call:
Additionally, we anticipate ad load on Facebook will continue to grow modestly over the next 12 months, and then will be a less significant factor driving revenue growth after mid-2017. Since ad load has been one of the important factors in our recent strong period of revenue growth, we expect the rate at which we are able to grow revenue will be impacted accordingly.
With ad loads being less of a factor going ahead (as the company cannot increase this infinitely), what exactly will fuel Facebook's growth, and by corollary, its stock price?
The Huge Potential Of Facebook's Pipeline of Apps
The answer lies in the strong product pipeline of popular apps which Facebook has assembled over the last couple of years. With slowing ad loads on its namesake property, Facebook (the company) can start ramping up the ad loads on its other popular apps, which have achieved a significant critical mass of their own. These apps should provide Facebook with more than enough fuel to drive its growth momentum going ahead.
There is a lot written on how each of the products/apps mentioned above could create value for Facebook. However, there is another product which is in Facebook's pipeline and doesn't get enough attention. Facebook search has achieved huge volumes and as per comments from CEO Mark Zuckerberg, monetization of this product shouldn't be too far into the future (Google take notice). Quoting the Facebook CEO from the Q2 conference call:
A growing way that people use search is to find what people are saying about a topic across the more than 2.5 trillion posts in our network. Now people are doing more than 2 billion searches a day between looking up people, businesses, and other things that they care about.
So when we talk about our strategy, I often talk about how when we develop new products we think about it in three phases. First, building a consumer use case; then, second, making it so that people can organically interact with businesses; and then third, on top of that, once there's a large volume of people interacting with businesses. Give businesses tools to reach more people and pay, and that's ultimately the business opportunity.
So, I'd say, we're around the second phase of that in search now.
Facebook's Growth Is Far From Slowing Down
It is no secret that Facebook has been growing rapidly. The company has reported rapid and steady growth across its key metrics. However, what is surprising is the fact that Facebook's growth has accelerated over time. While it is generally expected that companies slow down (in percentage terms) as the base increases, Facebook seems to be gaining further momentum.
The company seems to be growing faster, even as the revenue and earnings base has grown larger. The company reported a 56% YoY revenue growth in the first half of 2016 (1H 2016) which was significantly higher than the 40% YoY growth in the year-ago period. On the earnings front, the company did even better. Growth in Non-GAAP Net Income came in at 92% YoY for 1H 2016 compared to 28% in the year-ago period. Is Facebook defying the law of large numbers?
Facebook Stock Will Outgrow Current Valuations
The company today trades at a forward PE multiple of 24.7 (based on FY 2017 earnings estimate), which does seem high at a first glance. However, a look at the historic valuations tells us that the company has successfully outgrown its past valuations. The company has traded at an average PE multiple of 178 over its life as a publicly listed company. It won't be surprising if the company quickly outgrows its current valuation.