Facebook Inc (FB) is printing ad money. At least it seems that way, as FB stock investors were rewarded when the company reported better-than-expected revenue and earnings results.
The main driver was mobile advertising, which increased to 82% of total advertising from 73% in the year-ago quarter.
Overall, ad revenue increased 57%, while Facebook’s payments business declined 20%, as more people play games on their smartphones and tablets (where Facebook doesn’t have a payments platform) versus their desktops.
Indeed, the ad business is strong at Facebook, but as investors it’s important to understand the underlying factors behind the business to determine whether this strength can continue.
The Key for Facebook Stock
Users spend an average of 50 minutes per day browsing Facebook, Instagram and Messenger, Mark Zuckerberg told investors on FB’s first-quarter earnings call.
More users are logging into Facebook and spending more time on the company’s products than ever before. Daily active users increased to 1.09 billion in the first quarter, 66% of monthly actives. That’s up from a 65% ratio in the year-ago period.
Not only are users spending more time on average, but there are just more users in general. Facebook’s 1.65 billion users is about 30 million more than analysts expected it to report. Its 3.96% sequential increase in users is higher than any quarter in the past three years, and that’s with a significantly larger user base. For reference, Twitter Inc (TWTR) added just 5 million users last quarter (1.6% growth), less than a twelfth of Facebook’s net adds.
FB investors should note that most of that user growth is coming from Asia and the world outside of Europe and North America. Ad prices are typically lower in those geographies.
Facebook also got a boost in ad inventory from opening up Instagram’s ads API, which certainly helped increase its ad impressions.
On top of huge increases in user growth and engagement, FB also increased its ad load. While management did not quantify it, the average user saw more ads in their News Feed this quarter compared to the same time last year.
So, more users spending more time seeing more ads per minute — that’s a strong recipe for ad revenue growth.
Not only is Facebook showing strength in user growth and total ad supply, there’s plenty of demand to fill that increase in supply.
Facebook announced that it surpassed 3 million active advertisers last quarter, up from 2 million in Q1 of FY2015. FB also has 50 million small- and medium-sized businesses with a presence on its platform, up from 40 million. Comparatively, Twitter said it has nearly 10 million businesses on its platform, and just 130,000 of them are active advertisers.
On top of growing its active advertisers, Facebook is successfully grabbing more of their ad budgets. That’s an area where Twitter fell flat last quarter.
Facebook is winning by developing new ad products and better measurement capabilities, so businesses can see the impact of their ad spend more clearly.
Bottom Line for FB Stock
User and active advertiser growth show no signs of slowing down. While there are naturally upper limits to both, there still seems to be a few years of runway at these growth rates based on results from the last few quarters.
Management also says ad load is near its upper limits, particularly in more developed markets. The good news is that Facebook has loads of ad inventory opening up from Instagram, which currently sits at 400 million users and growing.
Facebook also announced a new ad platform for Messenger at its developers conference at the beginning of April. Both have a huge runway for additional ad inventory growth.
Meanwhile, Facebook is continually investing in ad technology and new products to provide better value to marketers. As the average value of an ad unit increases, the price paid per impression will increase over time.
All of these factors indicate that Facebook is in a strong position to continue growing its ad revenue at a rapid pace going forward.
As of this writing, Adam Levy did not hold a position in any of the aforementioned securities.
