Facebook's Quarter of Mobile Domination

What on earth could send shares of a seemingly overvalued company skyrocketing 15% in after-hours trading? Accelerating growth rates and mobile domination.

Posting big numbers where it matters most
Talk about a blowout quarter. Surprises don't get much better than Facebook's (NASDAQ: FB  ) second-quarter results today. Facebook was expected to deliver EPS of $0.14 and revenue of $1.62 billion. Instead, the company reported EPS of $0.19 on revenue of $1.81 billion. Let's take a close look at the important metrics.

Accelerating growth rates. Last quarter, Facebook's overall revenue was up 38% from the year-ago quarter. Its advertising segment, which contributes the majority of the company's revenue, delivered a nice year-over-year gain of 43%. Going into the second-quarter results, I was hoping Facebook would at least maintain this handsome growth rate.

Turns out, I was much too conservative. Overall revenue growth was up 53% from the year-ago quarter. Advertising revenue (88% of total revenue) soared 61%. Facebook's revenue growth rate meaningfully accelerated.

How did Facebook pull this off?

Growth in mobile. Not only did Facebook continue to boost its active mobile users, it is also effectively monetizing them.

Last quarter, Facebook's mobile monthly active users, or mobile MAUs, accounted for 68% of Facebook's total MAUs, yet mobile advertising revenue accounted for just 30% of total advertising revenue. Though Facebook's sudden success at monetizing mobile was impressive, it wasn't certain to what extent mobile MAUs could be monetized.

One quarter later, investors have a vastly larger foundation to build their projections on. Sequentially, mobile MAUs as a percentage of total MAUs were up slightly, at 71%. But mobile advertising revenue was up considerably, accounting for 41% of total revenue. Just three quarters ago, mobile advertising accounted for just 14% of total advertising revenue.

The once unanswered question of whether or not Facebook can monetize mobile now has a clear and stern response: Absolutely.

Other key metrics
Though Facebook's success in mobile was definitely the highlight of the day, I had my eyes on several other key metrics when the company reported earnings. In particular, average revenue per user and engagement rates.

A 53% boost to revenue is definitely impressive. But was it simply a result of the network effect's compelling invitation to new members? Or was it more effective monetization?

Though new members did join the addictive network, Facebook's revenue boost was mostly due to better monetization. Average revenue per user in the U.S. and Canada was up 27%, year over year. Worldwide, average revenue per user increased 24% during the same period. Last quarter, Facebook's growth rates in average revenue per user for the U.S. and Canada and worldwide was just 20.6% and 11.5%, respectively.

In short, Facebook's redesigned timeline and newsfeed and its evolving ad business seems to be working.

But is all this revenue coming at the expense of the user experience? Nope.

Facebook's engagement rate, or active users as a percentage of monthly active users continued to climb. Up to 71.2%, more Facebook users are using Facebook every day than ever before. In the year-ago quarter Facebook's engagement rate was substantially lower, at 58%.

Was there any bad news?
Mostly, Facebook offered impressive news on all fronts. But one area did show signs of a slowdown. Facebook's growth in total MAUs decelerated to 21% year-over-year growth, down from 23% last quarter. If MAU growth continues to decelerate, year-over-year revenue growth comps could get tougher in the future. Still, 21% is nothing to sweat about.

There's really no way around it: Facebook is still in its prime.

Time to buy?
Unfortunately, Facebook isn't an ounce of a better deal today than it was yesterday. In a matter of minutes, bullish investors boosted Facebook's market capitalization by a whopping $10 billion. Though the results were downright awesome, the stock's respective gain has already taken on the quarter's glory.

So, cheers to Facebook shareholders -- your business is firing on all cylinders. But if you are a prospective buyer, you'll still be required to fork out a handsome premium for this stock. Though that's not a move I'd be willing to make at this price, I will definitely keep Facebook on my watchlist.

Do you think Facebook is worth it's massive premium? Or do you want to deepen your understanding of this hot stock? You can learn more about Facebook's prospects and other major tech players in The Motley Fool's latest free report, "Who Will Win the War Between the 5 Biggest Tech Stocks?" which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.


Read/Post Comments (4) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 25, 2013, at 1:37 PM, TMFTomGardner wrote:

    I love the analysis. I disagree with the conclusion. We bought Facebook in the Everlasting Portfolio in Motley Fool One on July 1 at around $24. I believe the stock will more than double from this elevated price over the next 5 years. Strong growth rates, accelerating growth rates, young visionary founder with large stake, sterling balance sheet, giant market opportunity, projected earnings growth north of 25% per year for the next 5 years, and a clear indication that they can adapt to new platforms without regard for short-term Wall Street pressures. Value-based models don't work for true growth companies that reinvest their capital effectively. My take. Thanks for the strong article.

    Tom Gardner

  • Report this Comment On July 25, 2013, at 3:30 PM, mikecart1 wrote:

    "Facebook's engagement rate, or active users as a percentage of monthly active users continued to climb. Up to 71.2%, more Facebook users are using Facebook every day than ever before."

    I would like to know how FB is reporting or calculating this figure. Many websites now like ESPN require you to have a FB account to post. I have no doubt that people are making multiple FB accounts now so their real one isn't compromised by some weirdos.

  • Report this Comment On July 25, 2013, at 9:11 PM, Galway21 wrote:

    I agree with Tom Great article Don't agree with conclusion , FB at 34 is a lot better than Google at 800 and Apple at 450 For the little guy like me my money is on FB that can become a Google in few short years

    Martin

  • Report this Comment On July 26, 2013, at 11:57 PM, DukeMontrose wrote:

    So nice to be so full in flight, based on a single good report, after many disappointing ones. The not so foolish author wisely referred to the high premium on FB stock now.

    Reminds foolish me of RIMM in 2011, priced around 70XEPS.

    As a foolish investor in the Sir John Templeton mold, I blogged a wee warning about that pesky PER valuation. I argued a lofty PER mandates that EVERYTHING must click like clock-work.

    But, sadly, something ALWAYS happens.By the end of the year, RIMM lost some 2/3 of its market value.

    The stock was renamed = Blackberry sounds much more glamorous, but that did not prevent another sad swoon, more recently.

    I wish FB shareholders, especially the rosy eyed "small" investors, good luck. But please don't blame foolish me when the stock falls into the single digits.Remember, FB pays no dividends. NADA, ZERO, ZILCH. There is not even a whisper of PLANNING to pay a cash dividend.

    Memo = CASH dividend = investors ultimate reward. Everything else is bloviating.

    Yes, Virginia, SOMETHING ALWAYS happens.

    Or does not happen.

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