Remember when Facebook Inc (NASDAQ:FB) stock was trading at $18 and everybody was worried that the company had lost the mobile market? In hindsight, that would’ve been a great time to buy the stock. Foolish investing is not about timing the market, however, it’s about making an investment that has great long-term potential. To me, Facebook Inc (NASDAQ:FB)’s latest earnings results show a small glimpse of that potential.
Breakout second quarter
Facebook Inc (NASDAQ:FB)’s second-quarter results surprised everyone. The social-networking giant reported that its revenue grew 53% year-over-year, a sharp acceleration from the 38% growth in the previous quarter. The question arises: Where did this acceleration coming from?
Broadly speaking, there are two sources of Facebook’s revenue growth. First, the growth can come from growing user base. Second, Facebook’s revenue grows if it can extract more money from each user.
The chart below shows the year-over-year growth in Facebook Inc (NASDAQ:FB)’s monthly active users (MAUs) over the past two years.
Source: Company SEC Filings
You can see from the chart that the strong initial growth rate has been gradually falling, and has stabilized in the 20-30% range for the past four quarters. Facebook Inc (NASDAQ:FB) penetration in developed markets is reaching its peak, and most of the user growth is coming from emerging markets where advertising rates are generally lower. This means that user-base growth has not been the primary driver of the recent surge in revenue.
This brings us to the key metric that is driving the rising revenue: growth in average revenue per user (ARPU), which is shown in the chart below.
Source: Company SEC Filings
The chart above explains a great deal about Facebook’s story so far. After showing strong growth in the first three quarters of 2011, the ARPU growth fell off a cliff in fourth quarter. It even dropped below 5% in the second quarter of 2012. This was the period when Facebook’s desktop usage was declining and mobile usage had started to surge, but Facebook had still not started monetizing its mobile users.
That all changed in mid-2012 when the company ramped up its mobile monetization strategy. The company’s mobile News Feed and App Install ads have been a huge success; in its latest results, Facebook Inc (NASDAQ:FB) reported that mobile ad revenue accounted for 41% of its total advertising revenue.
In fact, Facebook’s mobile ad sales are growing so rapidly that it has market leader Google Inc (NASDAQ:GOOG) worried. Digital marketing researcher eMarketer estimates that the overall mobile ad market will grow 89% in 2013 to $16.65 billion. EMarketer estimates that Google Inc (NASDAQ:GOOG)’s share of the mobile ad revenue will remain stagnant at 53.2% in 2013 as compared to 52.4% in 2012.On the other hand, Facebook’s share of the mobile ad revenue is expected to almost triple, from just 5.4% in 2012 to 15.8% in 2013.
That is a remarkable achievement from Zuckerberg and his team as it has barely been a year since Facebook introduced mobile monetization.
You can see from the chart that soon after Facebook introduced its mobile monetization strategy, the ARPU growth started to accelerate, and grew an explosive 25% in second quarter of 2013.
There’s more growth to come
It doesn’t stop here; Facebook can keep earning more money from its users for a very long time.