- How Facebook Inc silenced critics with YoY revenue growth since IPO.
- Why WhatsApp is the best thing that happened to Facebook.
- Strategic acquisitions and unbundling of core website has driven Facebook growth.
The real story of how Facebook (NASDAQ:FB) has grown from a profitless entity to its current state of consistent revenue streams and strong profit generation. It has consistently identified core needs for success, including competing technology, user growth, and retention and has addressed them through acquisitions and key adjustments to its base platform of services. Whether you like it or not, Facebook is here to stay. Let us see if it is a good investment for the future or not is defined by some key facts.
Everybody is aware of the disastrous Facebook IPO and how the company did not have a clear mobile strategy when it went public. The social media giant has come a long way from those days. When looking at Facebook’s development and potential for future growth we take a look at its user growth, positive cash flow, revenue growth, and the ability to monetize its model which will form the basis for understanding and analyzing Facebook stock as an investment.
The Facebook Growth Story Since IPO
Facebook Inc, despite all the descriptions attributed to it, is simply a business. To the user, it is much more but as a tool to make your cash appreciate in value, it is a business. The core metrics it should be graded on are like any business, revenue growth, user base growth, bottom line profit and cash in the coffers.
Source: Facebook revenue chart by Amigobulls
|Revenue (values in 000's)||1,974,000||3,711,000||5,089,000||7,872,000||12,466,000|
Source: Facebook income statement by Amigobulls
Revenue growth is the lifeblood of strong businesses, and Facebook has shown an ability to maximize its user’s experiences to build a solid and growing flow of revenue. The company has consistently grown revenue at an accelerated pace and coupled with its ability to draw new users, future growth can be reasonably expected.
Because its model utilizes advertiser dollars as a revenue stream, user base growth is critical to Facebooks future. A key metric that the following chart identifies is often overlooked by analysts. In the past, smart phones were the overwhelming choice to access social media. With the release by Microsoft (NASDAQ:MSFT) of its Surface tablet, there has been a resurgence of users using tablets to access the internet. This chart shows that Facebook has been as adept at capturing tablet users, as well as smartphone users.
Smartphone Usage Metrics
At some point, the amount of available new users will capitulate and become smaller. The key to continuing revenue growth will be based on social media companies’ ability to engage users for longer periods, and provide services that will prevent them from leaving the site. Simply put, get them to come, keep them there. As per the recent Nanigans report on Facebook, growth in user engagement will drive Facebook revenues.
Facebook Cash Position
Cash on hand provides the company a valuable tool to acquire and develop new initiatives and technology essential to the company's future. The ability to address these issues without assuming debt separates Facebook from much of its competition. It has a unique ability to neutralize competing technologies and to develop new programs and initiatives without selling future profits.
|Cash (values in 000's)||1,785,000||1,512,000||2,384,000||3,323,000||4,315,000|
Source: Facebook balance sheet by Amigobulls
Without question, Facebook has established a strong track record of asserting profits. They have proven that they can continually maximize each revenue dollar and keep a majority of them in its bank. This shows the company is efficiently run and managed well.
Facebook Net Income
|Net Income (values in 000's)||100,000||668,000||32,000||1,491,000||2,925,000|
Source: Facebook financials by Amigobulls
We discussed the strong cash on hand that Facebook has in its war chest but why is that so important? This cash allows the company to make acquisitions (See: Top 5 Facebook acquisitions) and support research & development without taking on debt. It also avoids messy situations where the float becomes diluted through the exercising of debentures. This is a powerful advantage for Facebook, and it has used it to its advantage many times.
In August of 2014 Facebook told its users they would no longer be able to message others within the Facebook app. This caused a furor and at the time seemed like it might cause the social media giant to lose users. In reality, it turned out to be a savvy move that only bolstered Facebook’s user experience. The company identified that messaging was an important service to users and that by moving them to a separate app – that worked in harmony with the main app – it could improve and control the users overall experience. This strategic unbundling of the core website has created more users.
In February of 2014 Facebook did something that shocked the investing world. It paid $19 billion dollars for WhatsApp, a tiny company with only 54 employees. The deal raised concerns that the company had paid an extreme amount of money for something of little or no value. That was not true. What Facebook was buying was direct access to a database of over 450 million users. This in effect was the company removing 450 million people from the reach of its competition. In a world graded by the amount of users a company has it was a coup.
There was a metric involved that is also overlooked. The main source of WhatsApp's user base is not the US markets. It is dominated by users from developing countries. The US market is over-mined and offers less and less growth opportunity each year. But smaller and underdeveloped countries offer a deep pool of potential users. Access to a ready database insures Facebook's ability to capture more audience. To add to this, the company is also trying to be a part of basic internet in developing countries as increasing the number of internet users is a sure driver of growth.
If you ask yourself, where the next generation of user growth will come from, countries like Europe, India, Latin America and various parts of Asia is the answer. There were other reasons for the purchase, but access to the database insures Facebook's ability to capture more audience.
In 2012, Facebook bought Instagram, a picture sharing app focused on the young crowd. This was important because Instagram was becoming more popular by the day and was beginning to position itself as a competitor to Facebook. It also offered access and exposure to a massive database of young and active users. So, in one deal, Facebook effectively removed a competitor from its space and took its most valuable asset, its user base.
As the company moves forward, it continues to seek out relevant technology and identify competition. It takes the most efficient method of neutralizing it and without question, has the cash to back it up.
Who are Facebook’s real competitors? The answer is anyone that sells advertising via social media services. It also includes any company that relies on a strong user base. Twitter (NYSE:TWTR) is one of those companies. Google (NASDAQ:GOOG), Yahoo (NADAQ:YHOO) and LinkedIn (NYSE:LNKD) are notable others. Some would say AOL (NYSE:AOL) but over the years AOL has become so irrelevant they don’t make this list.
Google is the one that has the resources and savvy to compete with Facebook, but it focuses its business in a different direction, so there is room for both companies. However, the online video advertising competition will get tougher with all the biggies trying to get a bite of it. Even though Google leads the pack, the others are catching up. With Linkedin, Facebook's recent attempt with Facebook at work, could pose a threat to business networking site.
That leaves Twitter. Twitter growth is behind Facebook on most fronts like users, and monetization. Twitter recently announced that Google will add tweets to its search engine results. The CEO of Twitter states this will bring more exposure to the service with unregistered users. The problem is when a viewer that is not currently a registered Twitter user clicks on a link to a tweet they are taken to a login page. How many people are going to take the time to sign up for a service they probably were not interested in with to begin, just to see a 140-character tweet? Social media users are impatient, so probably not as many as the CEO expects. But here’s the real issue, when users click that link, they bypass the news feed for Twitter, and the news feed is where the advertising is.
Facebook has shown, it understands its business better than anyone else. It has also shown that it understands technology and has a sharp ability to separate what is important from what is irrelevant. They have built a substantial war chest and are not afraid to use it. They have grown the revenue stream from very humble beginnings to a billion dollar enterprise. While it does suffer temporary setbacks caused by adverse news and analysis by financial institutions, it is a solid company fundamentally. User growth estimates can be debated. Revenue forecasts can be debated. Competition can be debated. But fundamentals and a solid track record of record growth is documented and set in stone. There is no debating that.