I confess that Facebook Inc (NASDAQ:FB) never appealed to me as an investment. I avoid momentum stocks anyway, and I didn’t really believe that meaningful revenue would be generated by Mark Zuckerberg & Co. I was dead wrong.
Facebook has become a digital billboard, generating a massive 98% of its revenue from ads, which can be a terrific business. Now, more than 5 million businesses advertise on Facebook.com.
As technology improved and the ability to ascertain return on investment became more and more efficient, finding which sources for eyeballs would pay the best became easier. I never thought FB stock would be such a place, but here we are.
Not only that, but FB has gotten even better at figuring out how to leverage its users into generating more revenue, and a lot of that is happening via mobile. It makes sense, of course, because the entire world is mobile at this point and emerging markets are moving out of 2G into higher speeds.
Thus, FB stock has soared because it really owns the display side of generating digital ad revenue, while Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) owns the search side of the business.
I’m going to do some number-crunching here. I don’t want to overwhelm, but you’ll see how FB stock price is going up on the backs of some impressive growth as shown in Q4:
- Daily Active Users (or DAUs): 1.23 billion, geographically well-diversified with the U.S. & Canada at 15%, Europe at 21%, Asia-Pacific coming in at 32%, and the rest of the globe also at 32%.
- Mobile DAUs: 1.15 billion
- Monthly Active Users (also known as MAUs): 1.86 billion
- Mobile MAUs: 1.74 billion
- Growth in ad revenue for Q4, year-over-year was an astonishing 53% to $8.63 billion.
Not only are users growing, but the average revenue per monthly active user (or ARPU) is off the charts for North America, climbing from $9 in Q4 of 2014 to $13.70 in 2015 (more than 50%!) and $19.81 last year, up nearly 50%.
Going back to this idea that mobile revenue growth is exploding on the backs of improving mobile technology, mobile revenue in Q4 of 2014 was $2.5 billion. It nearly tripled to $7.2 billion last year.
When you look at the entire digital ad spend these days, it is dominated by Facebook and Google.
I hate the idea that 98% of a company’s revenues comes from one thing. Diversification means everything to me. However, I cannot argue with the fact that FB is the 800-pound gorilla in the space.
There are only three things that can upset the apple cart for FB stock, and neither seem like they could ever be permanently damaging. First, it is possible that something else appears that makes Facebook decline in popularity. This seems extremely unlikely at this point in time. Barring some kind of horrendous PR disaster that causes Facebook to implode, I don’t take this threat seriously.
Second, it is possible that the number of users is being misreported. How FB actually determines the number of users and how active they are is what matters here, and if advertisers ever lose confidence in that data, they could run for the hills. I’m not suggesting that this is the case, but if it were, then there would be trouble.
Finally, a severe recession could cripple advertising spending. The thing about this is that it would be temporary. The financial crisis took a toll on companies that relied on ad revenue, but it came back. Facebook’s balance sheet is a fortress, so little would be impacted.
FB stock trades at 40 times its earnings. And now, I can’t say it’s unreasonable considering its growth rate.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
