Facebook Added To S&P 500 And 100 Indexes

  • Facebook stock now a part of S&P 500 index.
  • Monetization of mobile users fueling topline growth.
  • Facebook ARPU needs to significantly increase to justify current valuations.

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Facebook (NASDAQ:FB) had been in the news for the wrong reasons over the recent months. After the privacy troubles and reports of teens leaving Facebook in Q3, for a change the reports are positive with the company being added to the S&P 500 and S&P 100 indexes. Facebook’s corporate journey has been a roller coaster ride of sorts and the addition to the benchmark index has been a recent high in the ‘Social Network’s’ short corporate life. The company has impressed the people at S&P and it is interesting to see the journey from a failed IPO to a successful corporate.

The company has been seeing a phenomenal growth in its topline ever since it began monetizing the FB platform a few years ago. Though popularity among users was easy to come by, the investors were left 35% poorer one year post IPO. After being touted as the greatest tech IPO, the management’s inability to monetize the fast growing mobile user base was a huge concern for the investors resulting in the stock price fall.

The company was profitable at the time of IPO. It had significant operating margins and was still growing its active users at a rapid pace. Financially the company was more stable in comparison to Twitter at its IPO. So what was the bitter pill in the Facebook story? The rapid growth in user base was more a result of increasing mobile users and not the PC users. However the company had appropriate strategy to monetize its computer users, it did not have a strategy to monetize its mobile users. This small fact had large implications for investors, wiping out half of the company’s net worth following its IPO. In a matter of three months the stock dipped by 53%, wiping out investor money. Inspite of these lows today the stock finds a place in the S&P benchmark indexes. So what exactly has fueled this turnaround?

The chart below displays the growth rate of Mobile user base against the growth rate of PC users.

Facebook mobile and PC user growth rate

Based on numbers reported in the company’s SEC filings

It is clearly visible that the mobile user base has been growing rapidly as compared to the PC users. Hence it was extremely important for the management to find a solution to monetize this user base.  The most important cause of turnaround in the fortunes of the company has been the management’s ability to come up with a strategy to monetize the mobile uses. This has resulted in higher revenue per mobile user leading to higher contribution of mobile advertising revenue to the total advertising revenue of the firm. The chart below displays the revenue components of Facebook’s advertising revenue.

Facebook advertising revenue components

Based on numbers reported in the company’s SEC filings

The result of the above two facts has been reflected in the topline growth the company has seen. The company has witnessed a phenomenal YoY revenue growth of 57% for the first three quarters of 2013 against a revenue growth of 37.2% in 2012. The successful solution to the mobile user problem has been hugely valued by investors, which is reflected by the 94% gain the stock has seen in the year-to-date. The news of the company’s addition to the S&P saw the stock rise by close to 5% in the regular trading session on December 12th. However we continue to hold that the company will have to significantly increase its mobile average revenue per user (ARPU), currently around $ 2.84 against its overall ARPU of $ 5.30, in order to justify its current stock price levels. Based on our Facebook stock analysis, we think the stock is overvalued. You can view our top stock picks here.

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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