Scale and Efficiency could make Facebook the next big winner

Submitted by Amigobulls as part of our contributors program.

Scale and Efficiency could make Facebook the next big winner

The one year post IPO saw Facebook price tumble close to 50% as the company struggled to monetize its rapidly growing mobile user base. However, With 5 quarters of solid growth in mobile monetization and a user base in excess of 1 billion; Facebook seems to be well on the road to financial success. After what had turned out to be a disaster of an IPO, the current financial performance of the world’s biggest social network could have opened up a solid opportunity for investors to benefit from its growth.

Facebook has a pipeline strategy to have a number of apps which have a scale that is difficult to replicate and impossible to ignore. This has led to the unbundling of its core “Facebook” product into separate apps for Chat and Facebook mobile. Also the company’s recent acquisitions are supporting this overall multiple app strategy. Facebook has scooped up products like Instagram and WhatsApp, which have gained a huge traction in today’s connected world.

We now take a look at the various Facebook owned apps, each of which has a user base totaling hundreds of millions (Instagram, messenger & WhatsApp). These apps hold a huge future potential for earnings growth at the firm.

This is apart from the fact that the core Facebook platform has reached a scale which is leagues away from its competitors.

However, due to the huge active user base of the social network, it is only natural that the trends in user base growth are beginning to slow down. The financial potential of a billion plus active user base remains huge and Facebook’s effective monetization strategy has driven solid growth in topline as well as earnings for the firm.

The current monetization strategy has led to significant improvements in the monetization levels on the core “Facebook” property which is currently driving Facebook’s revenue and earnings growth. The monetization level on Facebook is measured by the Ad revenue per user trends.

Ad revenue per user over last few quarters

The combination of Facebook’s scale and the solid growth in monetization has led to significant growth in revenue and earnings over the last few quarters.

Facebook revenue growth and EPS over the last few quarters

With the recent launch of auto play video ads and acquisition of LiveRail, Facebook monetization levels will continue to improve over the coming quarters. LiveRail is a leading publisher monetization platform for video, helping online publishers efficiently monetize their video ads inventory.

Facebook current valuations

The chart below displays the one year movement in Facebook’s LTM PE ratio.

Facebook PE ratio has consistently dropped over the last one year as the earnings growth at the firm has outpaced the price gains in the same time period.

In conclusion, as has been demonstrated over the last few quarters, further improvements in Facebook’s monetization levels coupled with the Social Networks huge scale will drive topline growth while the cost controls displayed over the last few quarters will continue to lead to exponential earnings growth. We compared Facebook fundamentals with its peers like LinkedIn and Twitter and found it to be most attractive of the lot. We believe Facebook presents investors with the best risk/return profile among the social network stocks.