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Concerns About Facebook, Inc.'s Future Are Greatly Exaggerated

By Tim Brugger - Sep 28, 2015 at 1:00PM

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Industry pundits sometimes question whether the social media king can maintain its stellar growth. Turns out, there’s no need to worry.

Months removed from its first-ever quarter of $4 billion in revenue, investors can still find an industry pundit questioning how Facebook (FB -5.12%) can continue its impressive growth. Despite its size, revenue jumped 38% in the second quarter compared to the year-ago period, and monthly average users grew by double digits, to 1.49 billion. As it stands, Facebook counts nearly half the world's connected population as MAUs.

At some point, it seems logical that Facebook would essentially run out of MAUs, particularly as so many of the globe's population are technologically lacking. Facebook has a plan for that, but even if MAU growth slows to a crawl -- a la Twitter (TWTR -3.84%) -- a new report indicates it won't prevent the social media king from prospering.

It's good and getting better
In April of this year, eMarketer predicted that digital advertising would climb to about $36 billion in just two years, representing 16% of global digital advertising spend. Turns out, those forecasts were on the low side. In a new report, estimates now suggest that social media ad spend will jump to $41 billion by 2017, from "just" $25 billion this year.

That kind of explosive growth in digital advertising in general, and social media spots in particular, is certainly good news for the industry -- but it's even better news for Facebook. Twitter, on the other hand, is moving in the opposite direction. Five months ago, Twitter was expected to grow revenue to $2.09 billion in 2015, good for nearly 9% of all social media ad spend.

But according to eMarketer, "Twitter's slowing user growth is impacting its ad business." It's no wonder. When you remove Twitter's SMS Fast Followers -- a new-ish MAU count that includes text messaging -- it only added 2 million new users last quarter. The result is Twitter's piece of the social media ad pie has been revised down to 8.1%, on revenue of $2.03 billion. The beneficiary of Twitter's less-than-stellar MAU growth and subsequent sales revision? None other than Facebook.

This year alone, Facebook will account for 64.8% of the world's social media digital ad market. While it's harder to move the needle when it already owns such a huge part of the market, by 2017 Facebook is expected to account for almost 66% of social ad dollars. There are a number of reasons Facebook is so dominant, including industry-leading ad targeting capabilities and the introduction of video spots. But Facebook has a couple other cards up its sleeve, too.

How'd they do that?
A primary driver of growth as cited by the recent report is the advent of spots on Instagram. CEO Mark Zuckerberg finally took the advertising wraps off Instagram earlier this year, and though he and Facebook COO Sheryl Sandberg both urged caution in expecting too much too soon, eMarketer isn't as conservative.

In its first year of monetization, Instagram is expected to add $600 million to Facebook's revenue coffers. By next year, its sales contribution will skyrocket to nearly $1.5 billion. Instagram's rapid growth, along with Facebook's itself, will also result in rapid revenue-per-user growth, up to $73.29 in 2017, more than doubling from 2014.

More arrows in the quiver
Facebook's WhatsApp mobile messaging service is quickly approaching critical mass. In this case, the vaunted 1 billion MAU mark. What makes the MAU benchmark so intriguing is that Zuckerberg has mentioned on multiple occasions that once WhatsApp crosses that threshold -- it's sitting on over 900 million MAUs already -- Facebook will look at monetizing the messaging service it spent $19 billion for in February of last year. At the time, WhatsApp boasted all of 450 million MAUs.

As for concerns surrounding how Facebook can continue to grow MAUs when so many users are already on board, Zuckerberg's initiative will play a key role. Beaming Internet access to the world's underserved masses in today's tech-dominant world is a philanthropic gesture, to be sure. But the business side of the initiative is also compelling. There are literally billions of potential Facebook "friends" without connectivity today, though that's already beginning to change.

Facebook remains one of the best long-term growth prospects available. And it's apparent that investors can expect Facebook's growth to continue for years to come.

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