Solid growth in average revenue per user (ARPU)
The chart above shows the year-on-year growth rate in ARPU, which is a measure of the amount of dollars that Facebook extracts from its users during a quarter. Notice how the growth rate fell off a cliff in the second half of 2011 and the first half of 2012. This was one of the major worries for investors at the time of the IPO. The reason for the sharp fall in ARPU growth was the growing trend towards accessing Facebook from smartphones rather than PCs. This had the impact of cannibalizing the company’s revenue at a time when Facebook Inc (NASDAQ:FB) had not yet come up with a mobile monetization strategy. However, once Facebook started to monetize mobile in the second half of 2012, the growth rate in ARPU picked up and has stabilized above the 10% level for the past two quarters now.
Recent developments suggest that the growth rate in this metric can rise further, and I think Facebook exchange (FBX) will play an important part in this. FBX is a tool that allows advertisers to serve targeted, real time ads to users based on their web browsing activity. FBX has received a very strong reception since debuting on the right side-bar PC ads in the second half of 2012. Now, Facebook is testing FBX ads in the News Feed as well and early reports indicate that the results are even better than the sidebar ads, which could help Facebook charge a higher price for these ads. Integration with the News Feed means that FBX ads could also make their way to mobile, which would be another big boost for ARPU.
FBX is a direct attack on Google Inc (NASDAQ:GOOG), which also has a similar tool in AdX ad exchange. Google’s dominance in internet advertising is under threat, as reports show that the FBX platform is less costly and more effective than re-targeted ads on other exchanges, including Google Inc (NASDAQ:GOOG)’s AdX. Facebook Inc (NASDAQ:FB)’s other significant advantage over Google is that it knows the social preferences of more than a billion users, and Google does not have access to this information as its repeated attempts to create an engaging social network, the latest of which is Google +, have been far from successful. With access to information about users’ social preferences as well as browsing habits, Facebook seems primed to challenge Google Inc (NASDAQ:GOOG)’s dominance in online advertising in the coming years.
Users are more engaged
One of the most common criticisms used to beat down Facebook is Facebook fatigue. Bears argue that a lot of people are getting tired of Facebook and the engagement levels are going down. However, Facebook Inc (NASDAQ:FB)’s results tell the opposite story. The chart above shows Daily Active Users to Monthly Active Users (DAU/MAU) ratio, which is a measure of user engagement. This ratio shows the proportion of Facebook’s monthly users who also log-in daily. As you can see, the ratio is at its highest point this year. This means that Facebook’s user engagement is growing instead of falling, and should help drive the company’s revenue.
Strong mobile growth
Mobile monetization has been one of the major concerns that have spooked Facebook investors. In addition to worries about monetization, there are also concerns that rival social networks like Tumblr, Twitter, and Snapchat are more attractive to mobile users. However, the chart above shows that Facebook’s Mobile momentum is very strong; Mobile MAUs grew 54% year-on-year for the most recent quarter. Moreover, Facebook is making more and more money form mobile advertising.
Facebook’s first-quarter results showed that its mobile advertising revenue grew 23% sequentially to $375 million, which represented 30% of Facebook’s total advertising revenue. With FBX ads still to come to mobile, there is still huge potential for future revenue growth over here.
Speaking of mobile, rival Yahoo! Inc. (NASDAQ:YHOO) just beat Facebook to acquire Tumblr, the photo-blog based social network for $1.1 billion. Whilst Tumblr would have been a great acquisition for Facebook Inc (NASDAQ:FB), I think that Yahoo! Inc. (NASDAQ:YHOO) just wanted it a bit more, and was willing to pay the premium price. Tumblr’s acquisition will give Yahoo! access to a young audience that is glued to mobile, and will help remove the stigma of Yahoo! Inc. (NASDAQ:YHOO) being “old school.” However, I believe that Facebook made the much better choice in acquiring Instagram for $1 billion, which can be a strong driver of Facebook’s mobile growth in the future.
A Fool’s opinion
Facebook Inc (NASDAQ:FB) was clearly overvalued at the time of its IPO because there were a lot of uncertainties around its future strategy and its ability to make money from mobile. However, the strength in the company’s underlying metrics since its IPO has proved many doubters wrong. With reduced execution risks and strong potential for revenue growth going forward, I consider Facebook good buy.
The article 3 Charts That Explain Why This Internet Giant Can Rise originally appeared on Fool.com and is written by Zain Zafar.
Zain Zafar has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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