4 Ways Facebook Inc Plans to Grow Revenue

Facebook has a number of unmonetized products that will be major contributors to the company's topline and bottom line in the future. Instagram, WhatsApp, Graph Search and Ads on Video-play are not making much revenues for the social media giant, but will be big drivers going forward.

Apr 29, 2014 at 11:50AM

Facebook (NASDAQ:FB) has been developing high-quality products for it's massive user base of 1.28 billion users, then monetizing those assets accordingly. The social-media giant has a number of assets in its portfolio that are barely making any money, but are likely to be major drivers of the company's earnings in the future. 

Over time, if leveraged effectively, Facebook's assets could begin taking a portion of online advertising market share from search engine giant Google (NASDAQ:GOOG) (NASDAQ:GOOGL).

Instagram's growth and monetization
The popular photo-sharing app has more than 200 million monthly active users and remains wildly popular among teens and younger demographics. Instagram, at the time of acquisition, had only 22 million users, and has since grown its users almost tenfold. 

Facebook management intends to monetize this extremely valuable asset once it sees more consumer usage across the globe. To that end, Instagram has launched new products that drive more value to consumers -- Instagram Direct and Video. 

Instagram's monetization is very much in the early innings. Management disclosed that few ad campaigns on Instagram's photogenic platform have been very successful, but stated that its revenue this year will not be very material. The creative and visually appealing photo impressions should be alluring to brand marketers and interest younger demographics as well. Instagram's revenue should aid Facebook's ARPU, stood at $7.46 in the trailing twelve months, and should drive even higher. 

WhatsApp's global reach
Facebook's acquisition of rising communications platform WhatsApp has been a great strategic move by the company. The rapidly growing cross-platform service had 450 million active users at the time of the acquisition and recently crossed 500 million users.

With a large and engaged user base, WhatsApp has the potential to earn significant revenue with ads on its platform. In addition, WhatsApp's CEO stated that the company is growing fastest in key emerging markets including Brazil, Mexico, Russia, and India. Its massive user base is sharing more than 700 million photos and 100 million videos every day. 

Roughly 70% of the company's user base uses the platform daily. WhatsApp is in the process of adding voice calls to its communications product line, which will enable the company to compete with bigger competitors like Microsoft's Skype, and start generating higher revenue in the process. In addition, being owned by Facebook, WhatsApp will retain the option to monetize its user base with advertisements in its platform in the distant future. 

Video ads on news feed
Facebook's launch of auto-play video ads for users has gained momentum. Since Facebook has more than 800 million daily users and 1.3 billion monthly users, the quantity of user-generated videos will increase substantially in the future. 

Management disclosed that the company's advertising clientele would be very interested in displaying ads on the News Feed. The high engagement of Facebook users makes it very lucrative for marketers to reach target demographics through online video ads, whether through sponsored stories or on the user-generated content. 

This revenue stream can potentially be very big for Facebook. Online advertising giant Google earns an estimated $5.6 billion annually in gross revenues through YouTube, before paying out traffic acquisition costs to creators of such content. As a result, YouTube holds a 21% market share of the U.S. video ad market, according to eMarketer. Facebook can adopt Google's playbook and monetize users in a similar manner, and can scale substantially over time.

Graph search
Facebook's graph search function has been steadily making progress, indexing a lot of data, and is likely to stay that way for a few more years. Mark Zuckerberg has stated that, in the long run, he envisions Graph search to be an extremely useful search function, and one that can generate revenue for the company.

Google is extremely dominant in the global search engine market, and only a company with the size, scale, and financial resources of Facebook can potentially challenge Google. Only two regional search engine companies have managed to beat Google, but only due to language barriers -- Baidu in China and Yandex in Russia. Facebook is a very formidable competitor for Google, and because of its global reach, installed user-base, and user data, it can potentially grab a piece of the global search advertising pie that is heavily controlled by Google.

The takeaway
Facebook doesn't earn much revenue from any of the above-mentioned future drivers. However, the company's organic revenue growth stood at 72% in the last quarter. Zuckerberg is a visionary CEO who sees the future better than most other CEOs, evidenced by his string of asset acquisitions that have substantially widened the company's moat. Once the company starts monetizing these four drivers, its EPS will see big increases, driving share prices higher.

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Google (A shares). The Motley Fool owns shares of Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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