On Wednesday, Facebook (FB 0.38%) obliterated earnings expectations to kick off 2021. Revenue and net income surged 48% and 94% respectively year over year to $26.2 billion and $9.5 billion. Advertising was of course the primary reason why. Ad sales jumped 46% higher, and Facebook will begin lapping initial effects of the pandemic last year when marketing hit the skids -- which means a similar jump higher in revenue is in the cards in the second quarter as well.
But advertising is only part of the story at Facebook. Often overlooked is the company's "Other" revenue line item, mostly consisting of its Oculus virtual and augmented reality (AR/VR) business and its e-commerce platform. Facebook is investing gobs of cash in these areas in a bet on the future economy, and a 146% increase in revenue indicates it's already paying off in a big way.
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"The next computing platform"
CEO Mark Zuckerberg has noted many times that his company views AR/VR as the "next computing platform," immersing users in the digital world beyond what PCs and mobile devices are capable of. The Oculus Quest 2 headset, released last autumn, is more than just a big sales hit. It eliminates the need for wires from an AR/VR experience, which up to this point was a limiting factor for the technology.
So is display resolution, which is one cause of the motion sickness some people get when using VR headsets. But software updates will allow Oculus app developers to bump screen refresh rate up to 120hz (Quest 2 currently supports up to 90hz), another step in making AR/VR more approachable.
It all might sound like a trippy experiment for the most adventurous of gamers, but Quest 2 supports a lot more than video games. On the earnings call, Zuckerberg also touted the new work updates pushed to Quest 2 for those who have a virtual office. Social media is also one of the most used applications with the headsets. And new apps for exercise and wellness have expanded on the use cases for AR/VR.
Beyond the realm of personal use, Oculus has also been shipping headsets to businesses for use in training and has aspirations to act as an interface on the job too. A display that overlays the real world with relevant digital information or instructions is just the beginning.
Zuckerberg said advancing this future computing platform will continue to get a lot of attention at Facebook. Specifically, neural interfaces (devices that can be controlled with your mind) are one area of particular interest. Remember when Facebook bought mind-controlled wristband maker CTRL-Labs a couple of years ago? The company is still hiring. Facebook has job listings for researchers in neural interface interactions.
It's going to take years for these investments to pay off, but for now, I'd say Oculus is doing pretty well. It's the primary component to the "Other" revenue segment, which was 3% of total sales in the last quarter.
E-commerce and a platform for creators
There are other projects that will have a quicker payoff for the social media giant. E-commerce has been cemented in place as part of the new normal around the globe, and Facebook isn't about to be left out of the feeding frenzy. Through its work on Shops for merchants (powered in part by Shopify's software) and Marketplace (which now receives visits from 1 billion people each month), Facebook has already built a sizable commerce community.
But most of its revenue on this front comes from small business ads. It's plowing cash into other areas to support customer service, especially using messaging. For many businesses and their customers, chat is the preferred method of staying in touch and transacting business. To build on Messenger and WhatsApp capabilities for business, Facebook recently announced the purchase of relationship management software outfit Kustomer.
Digital payments also hold a lot of promise. Facebook is already operating in India via WhatsApp Payments and recently received approval to launch in Brazil. This could also play into Zuckerberg and company's vision of a global economy that supports more creators -- people working for themselves, and doing work they actually enjoy. Messaging and digital payments are critical components of the self-employment resurgence that's starting to take place.
Interestingly, this same viewpoint was the seat of motivation for digital payments company Square acquiring music streaming service Tidal. Big tech sees itself as a supporter of entrepreneurship and creativity, and Facebook's social apps could play a big part in this movement.
To be sure, Facebook is still an advertising-based company. It still has a long way to go before it is diversified away from its controversial breadwinner business. But it's making headway with AR/VR and e-commerce. As the company grows by leaps and bounds this year, keep a close watch on that "Other" revenue line item.
