Facebook (FB 1.09%) is well positioned to profit from the burgeoning global population that will depend on it to stay connected on the social front. For this, the company seems to have a robust business plan in place.
Financials
Third-quarter earnings for Facebook were impressive. Revenues increased to $2.02 billion from $1.26 billion in the comparable quarter last year. This was largely due to increased mobile advertising revenues. Net income came in at $425 million, a remarkable increase from the $59 million loss posted in the comparable quarter last year.
Source: Facebook Earnings Release
Why are the alarm bells ringing?
Facebook is losing ground to lightweight and photo-focused networks like Twitter, Snapchat, WhatsApp, and even Facebook’s own Instagram. The popularity of Facebook is waning among teens. A recent survey has indicated that currently only 23% of US teenagers prefer Facebook to Twitter and Instagram. This is a 21% decline from the comparable period last year.
The online market for US teenagers is $200 billion per year. Social media strongly influences the online purchasing decisions of these 30 million teenagers. Consequently, as advertisers have a decreasing audience that they can potentially reach through Facebook, the company's advertising revenues could be adversely affected.
Critics are arguing that people "join" Facebook, but they "use" Twitter. The engagement levels on Twitter are significantly higher compared to Facebook.
Silver lining
Facebook continues to enjoy a growing user base. Over the last 10 years, its subscriber base has grown at a mind-boggling pace of 120% per year. Facebook has posted a 33% increase in its Average Revenue Per User (ARPU) to $1.72 in the current quarter.
Source: Earnings Release for Q3'13
Sheryl K. Sandberg, COO and Director, stated the following in the third quarter earnings call:
Facebook and Instagram have more “mobile time spent” than many of the next largest services including YouTube, Pandora, Yahoo!, Twitter, Pinterest, Tumblr, AOL Snapchat, and LinkedIn combined.
Due to their high engagement levels, News Feed ads have a significantly higher price per ad than right hand column ads. This is the category Facebook is now focusing on and expects to be the key driver of growth.
Facebook is working hard to establish a link between its advertisement campaigns and the increased store spent by customers. For instance, its client Mondelez was targeting households across a particular segment. Facebook was able to demonstrate that a 9% difference existed between those households who saw their advertisements versus households that didn't see their ads.
From brands to direct response to local businesses to developers, a multitude of businesses seem to be vying to get a share of the Facebook, leading to higher cost per click (CPC) for Facebook advertisements.
New initiatives
The company is gearing its products development efforts toward improving offerings such as News Feed (which fetches more revenue than right hand column ads), Graph Search, and mobile apps. The Facebook AI group has been formed to conduct artificial intelligence research on the repository of knowledge that people have shared on Facebook.
The company has initiated campaigns such as Internet.org, a global effort to make affordable Internet access available to everyone. This can help it harness the untapped potential of 5 billion people who are still not online.
Instagram, the photo sharing service that Facebook acquired, now boasts of 150 million monthly active users.
These initiatives are likely to drive growth for Facebook.
Final words
The decline among its teenager user base may only be temporary. In addition, there are statistical issues to contend with. Self-reported age data is unreliable for younger users and thus it is difficult to measure youth engagement. Teenagers are more driven by hype rather than utility. When these same teenagers reach adulthood and seek to connect with old friends, they would invariably be back on Facebook.
There is no reason to be jittery about the Facebook's prospects. Stay invested in the stock and you will be positioned to reap rich returns.
