Social media firm Facebook Inc (NASDAQ:FB) was founded in 2004 and has already grown to one of the top 10 largest public companies in the world. This growth has come from an ever-increasing user base that likes to share photos, comments and videos throughout the globe.
The firm makes money by selling access to its social network to advertisers who want to sell their goods and products to Facebook’s users. Advertisers in the United States and Canada appear to be making the most of accessing the largest social network on earth.
Facebook’s future growth depends on exporting this success to the rest of the world. If it does, shareholders could see the FB stock price move 70% higher from current levels, and further if the company can hit some already aggressive growth targets already built into the share price valuation.
FB Stock: Eye-Popping Metrics
Facebook tracks several user metrics across its global user base. It tracks daily active users (DAUs), monthly active users (MAUs), as well as one known as average revenue per user (ARPU).
In its third-quarter report Facebook detailed ARPU of $4.01 on a worldwide basis. In other words, Facebook brings in just over $4 on average for every user on its website. Technically, it is total revenue divided by MAU at the beginning of every quarter.
Based on page 12 in Facebook’s third-quarter earnings slide, there is a rather wide disparity of ARPU across the geographies that management tracks. ARPU is highest in the U.S. and Canada — in fact it grew nearly 50% in the latest quarter to $15.65.
The next highest market is Europe. ARPU grew 36%, but only to $4.72. ARPU in the Asia Pacific region was only $1.89 during the third quarter and an even lower $1.21 in the rest of the world.
Facebook explains that the higher U.S. and Canadian revenue per user is because of the “size and maturity of those online and mobile advertising markets.” It is also fully aware of the disparity with the Asia Pacific and other regions. Figuring out how to export the success in its home market to the rest of the world is the key to future stock returns for shareholders.
Fitting ARPU Into Facebook’s Mission
One of Facebook’s mission over the next ten years (about as long-term a mission as you are likely to see from a public company) is to help get more people across the world online. It recently mentioned working with Internet.org to bring an additional 40 million people on to the internet.
Clearly, more people surfing the web through their computers and mobile devices is a mission that firms including Netflix, Inc. (NASDAQ:NFLX), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), and Amazon.com, Inc. (NASDAQ:AMZN) are pursuing. Facebook is even trying to offer free internet access to gain new users across the globe.
Facebook boasts approximately 1.6 MAUs, which qualifies it as the largest social network in the world. Because of the growth FB stock is experiencing, this scale is turning out to be a great thing for investors.
For the year, analysts expect FB to grow revenue by more than 50% to $27 billion. In 2017, analysts project a 34% jump to nearly $37 billion. Earnings for each period should hit $4.09 and $5.21, respectively.
The Risk for Investors
FB stock trades at a forward price to earnings multiple of about 29. That drops to below 23, if it hits its earnings expectations next year. Overall, that is about a 50% premium to the average stock market multiple right now.
The lofty valuation also implies a certain level of growth embedded in the share price. If Facebook grows about 20% for the next decade, then the stock is about fairly valued.
There is a good chance that, based off current growth trends, Facebook grows at a faster rate. Growing consistently for 20% for 10 or more years seems a tall order, but if the company can grow 30% for the next five years, FB stock could gain 70% to nearly $200 per share.
Facebook is growing rapidly, and its potential is arguably still untapped. If it can grow its ARPU across the globe and have it reach the level it already has in the U.S. and Canada, its growth could continue unabated for many years. And it shows few signs from slowing in its home markets, where ARPU is growing at a rather rapid clip.
As of this writing, Ryan Fuhrmann was long shares of Facebook, but did not hold a position in any of the other aforementioned securities.
