- Facebook recently acquired Wit.ai and QuickFire.
- User growth continues to slow even as engagement metrics are improving.
- Improving engagement metrics will drive Facebook revenue growth as well as Facebook revenue per user, leading to continued growth in Facebook earnings.
Facebook (FB) is back in the news, following a couple of acquisitions to begin the new year. The social media giant acquired voice recognition company wit.ai and also acquired video compression service QuickFire. Apart from the acquisitions, new data on growth and engagement from Pew research is out, indicating user engagement is on the rise. We think Facebook earnings will continue to grow as more of Facebook revenue drips down to the bottom line, driven by growth in user monetization and higher Facebook revenue per user.
Facebook Acquires Wit.ai and QuickFire
It is unclear as to how wit.ai will help the social media giant. However, the acquisition of QuickFire has a clear intent. In a world where video advertising is accounting for more and more online advertising dollars, the QuickFire acquisition could help Facebook create its own video hosting platform. While the terms of the two deals are being kept under cover, the QuickFire acquisition is aimed at increasing online video advertising share for Facebook.
The online video ad spend is expected to grow 17% annually over the next two years to reach $11.4 billion by 2016. The company’s interest in this space is understandable, given the huge growth expected in the market which will only add to Facebook ad revenue.
Facebook User Growth Slowing
A recent report from the Pew research center showed that user growth could be slowing as Facebook’s user share of online adults remained flat from 2013 to 2014, at 71% of online adults.
However, this isn't surprising as the company has reached a huge scale in terms of number of users, which is significantly higher than any of its competitors. Given the huge user base and also the popularity of the social network among internet users, incremental growth in this metric will continue to be tougher. Given the tougher comps on user growth, engagement metrics will drive monetization and by extension, Facebook's revenue growth as well. The Pew report had some encouraging news for Facebook investors in terms of engagement.
The percentage of users using the Facebook platform saw a 7 percentage point improvement from 2013 to 2014, which were the most significant gains amongst any of the social networks. According to the report, 70% of total users now use the platform daily, with 45% of the users using it several times in a day.
Daily users as a percentage of total users
Source: Pew research report
Facebook Revenue Per User Rises Higher
The results of the Pew research are reflected in the financials of Facebook as the company has started to see acceleration in average revenue per user (ARPU) in the last two years even as user growth has been steadily on a decline.
Facebook Revenue Per User Growth Chart
Facebook has made an ARPU of $6.1 in the first three quarters of 2014 and will, in all likelihood finish the year with an ARPU in excess of $8.1, largely driven by improvements in the mobile ARPU. The growth in ARPU will drive Facebook earnings growth as well as Facebook revenue growth even as user growth continues to slow.
As per our Facebook stock analysis, the stock currently trades at extremely high last twelve months (LTM) valuation multiples.
Facebook valuations, though pricey are significantly lower than year ago levels and have been helped by significant growth in revenue and earnings through the first three quarters of 2014.
The growth in Facebook earnings could outgrow its valuations and lead to significant upside in Facebook stock price even in case of contraction in the valuation multiples.
Facebook recently acquired two start-ups with one of them clearly focused on the video ad markets. The focus on the video ad space could help improve Facebook revenue per user, which will be the key driver of Facebook revenue and earnings as the user growth continues to slow. Earnings growth could outgrow current valuations, leading to Facebook stock price gains even if valuation multiples see further contraction from current levels.