Like many technology companies Facebook’s future revenue can be reliably estimated by the number of users multiplied by the Average Revenue Per User (ARPU). If one of those grows, so does revenue. If both grow, the combined result is the sort of stellar revenue growth Facebook has enjoyed since its start.
Monthly Active Users (MAU)
Facebook’s key user number metric is Monthly Active Users (MAU) which is now at a staggering 1.276 Billion. To achieve this level of MAU, its Growth Rate (Q/Q) was extremely high in the company’s early years. However around 6 months ago the rate of growth looked like it was becoming zero, meaning Facebook’s user numbers looked like they were about to peak.
However, in the two most recent quarters the user growth rate has picked up again to around 3.8% (Q/Q), which implies annual growth of around 14%. Though this is probably more as a result of company acquisitions such as Instagram than organic growth, it is still impressive.
Can This Level Of Users Be Maintained With So Many Competitors
A barrage of new entrants and services are constantly entering the social media space and just as Facebook’s initial rise was meteoric, the growth rates of these new alternatives are often just as spectacular. The question will always remain that whether at some point, users will find a rival that they prefer and simply switch en-masse. This question is not likely to go away any time soon, if ever, but a comparison with Google seems appropriate.
Google was not the first search engine but once it had launched and achieved a certain critical mass, it dominated the space and has remained the dominant player ever since. Facebook continues to stay relevant with its users and remains aware of its competitors. It continues to launch new apps that compete with the services of any upstarts, and through its huge cash pile it can acquire some of the more attractive ones. It seems likely that even as new entrants come and go, Facebook will be the pivot point around which Social Media interaction occurs.
Average Revenue Per User – ARPU
The other factor used to estimate revenue is Average Revenue Per User (ARPU). This will be around $2.50 during this year. Although Facebook is free (“and always will be”) Facebook generates money mainly through advertising (currently around 89% of revenue). Broadly speaking, ARPU has been on an upward trend as Facebook has increased its product range, both internally and through acquisitions, and the availability of those products on different platforms (IOS, Android etc).
The December quarter is always the strongest growth due to Christmas occurring in the US (the US still represents 47% of revenue). The past two quarters were also very strong as a result of an improved spend from Mobile devices.
Facebook has managed very consistent increases in expenditure as a percentage of revenue, in all categories. Given the stellar growth rates achieved for revenue it is no small achievement for the company to have kept a tight rein on costs in this way. The main categories of expenditure and their percentage of revenue are Cost of Revenue (27%), Sales and Marketing (12%), General and Administrative (10%) and Research and Development (17%).
Adding the above expense percentages makes an expenditure total of 66%. This leaves a net profit percentage of 34%. Given that Facebook’s revenue is enormous and still growing, having such a huge net profit margin is impressive. Most companies, particularly technology companies have to sacrifice short term profits to achieve growth in user numbers and then must struggle to keep them through being continually aggressive in pricing and promotion. Facebook is well past this point but still continues to deliver impressive growth in users and revenue per user.
Facebook is a company that has a huge and loyal user base, good revenue growth potential through an expanding product portfolio and platform, a stable and well managed cost base, and a strong profit margin and cash-flow. The stock looks reasonably priced in today’s relatively buoyant market given the company’s proven ability to adapt and innovate in a growing market, and its likely future role as the pivot point around which social media interaction occurs.