Facebook’s rising stock price makes complete sense: here’s why

Facebook’s stock price has hit record levels following the announcement of its most recent set of results. To a large degree, that makes sense. The results were pretty solid. There are, however, a few other factors worth considering.

Once your base grows as large as Facebook’s has it becomes a mathematical impossibility to grow at the same rate. Firstly, most of the users have adopted Facebook already that were keen to do so and secondly your potential user group gets smaller.

I guess one could argue that if every human with a reliable internet connection had a Facebook account, the company could have a whole lot more than 1.32-billion users. On the other hand, roughly 63% of that base uses Facebook daily. Monthly active user growth meanwhile is around 3.5%, a number that has the pundits divided. Around 40-million users were added in the last quarter, meaning that one in five people around the world now log into their Facebook accounts on a monthly basis.

None of those concerns however appear to have bothered the market. How things have changed.

Cast your mind back to when the business listed, its IPO price was US$38 a share on 43 cents worth of earnings. A little while later, it was trading as low as US$18 and everyone was calling the IPO a disaster. Analysts started to question whether or not the company would be able to monetise mobile. That was the real anxiety. Those concerns were quickly put to bed as the company showed its ability to keep up and modify what is a successful model.

We all like to know what our mates are up to. We would like to think that they would like to know what we are up to too, pictures of your dogs and kids and your wonderful time is actually of interest to me. For most people who have left school and tertiary institutions the platform is perfect. I could not care that teens are not too taken with Facebook, they see their frenemies friends each and every day.

Once you have a life that involves working, a partner to share that with and little people (and pets), the natural way is to share that with others, that is the way we are designed. Communication is at our core. Fear of missing out is real.

The company sums it up perfectly in the about us segment on its investor relations page:

“Founded in 2004, Facebook’s mission is to give people the power to share and make the world more open and connected. People use Facebook to stay connected with friends and family, to discover what’s going on in the world, and to share and express what matters to them.”

Anyhow, I am sure that there are many people preparing their respective theses on user patterns and how it impacts their lives, we are more concerned here on the business of their business. So let us start with the numbers. Revenue for the quarter was US$2.91-billion, well up from the corresponding quarter this time last year, which was “only” US$1.813-billion. That is a 61% increase.

For the half year the company had revenues of US$5.412-billion. On a per user basis, that equates to 68.3 US cents of revenue per user per month. When you put it like that the potential for Facebook to leverage off its user base suddenly seems huge.

Net income for the quarter was US$800-million and US$1.976-billion for the half year. Earnings per share, Non-GAAP, 42 cents for the quarter and 76 cents for the half. While Facebook is still a value investor’s dragon to slay, it is ironically half the valuation of when it listed and double the price. In roughly two and a half years. Astonishing.

The anxiety of the company being able to monetise mobile? Ha-ha! Mobile advertising revenue represented 62% of total advertising revenue in the last quarter. Mobile ad revenue grew at a mind blowing 151% year over year. 1.07-billion people check out Facebook on their mobile phones and more amazing is that 399-million people ONLY use their mobile phones to check Facebook. That number is climbing all the time.

The most incredible set of numbers out of all of this is just how scalable this company is, notwithstanding the fact that they continue to add staff and expenses. I have taken this slide specifically from the Quarterly Earnings Slides:

Expanding margins on growing revenues leads to outsized growth on a per share basis. Obviously this cannot continue forever, there are a few key points to make about their current business. Firstly revenues are still very much cemented in the developed world, USA & Canada and Europe account for 43.9 and 28.2% of advertising revenue respectively: 72% in total. Asia accounts for 15.2% and the balance for the rest of the world.

As you can see from the earnings, the company is wildly expensive on a fundamental basis. The options are open for explosive growth still, continuing to have what is the most pointed advertising platform currently. It is not a business that is for everyone to own even if the prospects look amazing.

I definitely have a buy rating on the company and continue to believe that their adaptations to the world around us will continue to drive user engagements and subsequently higher revenues. Facebook will pursue a multitude of new business angles, from payments to software/hardware like Oculus. This company is mostly an advertising business with different interesting other segments to it. Sound familiar? Oh yes, sounds pretty much like Google.

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This article by Sasha Naryshkyine is adapted from the Vestact newsletter and republished with permission.