Facebook Has Immense Upside

Facebook's  (NASDAQ: FB  )  stock has done immensely well in 2013. However, the company's last earnings report spooked a number of investors prompting a sell-off. Most of these worries are largely overblown; Facebook is supremely well-positioned to do well in the long run. 

Strong growth in place
In the last quarter, Facebook's top-line revenue saw yet another reacceleration. Facebook's revenues increased 60% year-over-year to $2.02 billion. For a company as big as Facebook, revenue growth like this is very rare. Facebook's operating margin in its third quarter stood at $736 million, which represents an operating margin of 37%. The company's operating margin stood at 30% in last year's corresponding quarter, so the company's operating margin ramp is a big and notable positive. 

In spite of its mammoth user base, Facebook is still signing up newer users -- mostly from developing regions of the world. Facebook's user base increased 18% year over year to 1.2 billion. The number of users tuning in on a daily basis stood at 728 million, or 61% of its total monthly users. 

The growth of mobile devices has been a major blessing for Facebook's business. Facebook's mobile active users at the end of the third quarter stood at 874 million. Facebook's stellar revenue growth was largely driven by the number of ad impressions delivered, which went up 16%, and the price per ad that shot up 42% from a year ago.

Facebook is showing a lot more ads on news feed, and since ads on the news feed have much higher levels of engagement, the ad pricing is higher than ads on Facebook's right hand rail on.

Mobile is supremely well-positioned
Facebook's mobile fortunes have picked up dramatically and the company's advertising revenues are following in that direction. Facebook's mobile ad revenue made up 49% of total ad revenue in the last quarter, or roughly $881 million. 

On a comparative basis, Facebook's mobile ad revenue a year ago stood at 12% of total ad revenue in last year's corresponding quarter or roughly $152 million. However, Facebook is not the only company that is benefiting immensely from secular trends toward mobile.

Google  (NASDAQ: GOOGL  )  has been a major beneficiary of this trend as well. Google's video sharing platform, YouTube, is now getting more than 40% of its total viewer traffic from mobile devices. And Google's Android OS has been activated on more than 1 billion mobile devices. And such compelling usage on mobile devices is enabling Google to earn billions of dollars in ad revenue from mobile devices.

Users are spending more time on digital media services relative to TV. For the full year of 2013, users will spend roughly 5.25 hours a day on digital media services including mobile, and 4.5 hours watching TV in the US, according to eMarketer. And this represents a big opportunity for Facebook to monetize this time spent on digital media by placing ads on mobile news feed. Safe to say, both Google and Facebook will gain a lot of revenues from this shift in media consumption by users. 

Future growth drivers
The global Internet population is still one-third of the world's population and growing at roughly 9% per year. In the US, roughly 20% of all time spent on apps is on Facebook services, according to comScore. Facebook's CEO Mark Zuckerberg is very excited about the future prospects of the Graph Search tool and is collecting a lot of data and knowledge for that tool. The function is still in the early beta stages and on desktop only, but is expected to be rolled out on mobile devices as well in the future. 

Facebook now has in excess of 1 million active advertisers, and more than 20 million small businesses. The company doesn't aggressively market its services to this huge group of small advertisers, and in the future, this will be major revenue source for Facebook.

Instagram has in excess of 150 million active users uploading millions of photos each day. Placement of ads on Instagram is still in the early innings, and is expected to be a major revenue generator for Facebook in the future. Instagram's relatively recent launch of video has been a strong positive and is likely to be a revenue generator for Facebook in the longer term. And this endeavor should also aid Facebook to launch video ads more broadly on its social media platform.

As more brand marketers and local businesses are seeing the value of ROI generated from ad placements on Facebook, the company is benefiting from newer clientele. Better ways to measure the ROI from ad placements on Facebook will be a huge positive, and bring in newer clients for the company.

Going forward
Facebook will continue to reap the benefits of secular consumer trends toward mobile devices. The company can capitalize on this shift by adding newer advertising clients, and building more ad products for its existing advertisers.

The company's recent sell-off was due to a slight decrease in user engagement among the younger teens in the U.S., but many of those younger teens are spending a lot of time on Instagram. Mark Zuckerberg did a fantastic job by acquiring Instagram, and the combined entity will continue to grow their total number of users, and generate substantial revenue growth for years.

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