The book How Google Works talks often of the convergence of the internet, mobile phones and cloud computing. Firms that actively embrace all three are able to credibly scale their target market to every human being on earth with an internet-connected smartphone. It’s one of the more powerful growth trends in the marketplace today, and the success of Facebook Inc (NASDAQ:FB) is perhaps the paradigm case of succeeding on all three fronts.
Facebook tracks several user metrics across its global user base. It tracks daily active users (DAUs), monthly active users (MAUs) and average revenue per user (ARPU). In addition to its namesake, it also runs Instagram, WhatsApp and Oculus (which aren’t included in user breakdowns).
Breaking Down FB’s Users
DAUs for the first quarter of this year rose 18% to 1.28 billion. MAUs jumped 17% to 1.94 billion. That’s over a quarter of the 7.5 billion humans on the planet, or one of the largest client bases in the history of capitalism. Mobile advertising revenue was 85% of the $7.9 billion in reported total advertising for the quarter. Payments and other fees fell 3% to $175 million. Combined, that represents a total sales increase of 49% versus the first quarter of 2016.
Nearly one-third of the monthly active users live in the rest of the world, or emerging and developed markets in addition to the three primary ones that Facebook breaks out separately: 33% reside in the Asia-Pacific region, roughly 20% are from Europe and 14% are from the home market of the U.S. and Canada.
The average revenue per user category should be of particular interest to investors. Although the home market has the fewest total users, it accounts for nearly half of total advertising sales (it was $3.9 billion during the first quarter). That works out to an ARPU of about $21.
Europe is the next highest ARPU at $5.27, but a far cry of what Facebook makes at home. The Asia Pacific region is even lower at $1.90, and rest of the world is quite low at 64 cents. I found this surprisingly low, but still understandable given the U.S. is by far the largest class of spenders in the world.
What This Means for FB Stock
To me, this speaks to Facebook’s future growth potential. Boosting advertising to consumers outside of the U.S. and Canada is of paramount importance to sales and profit growth down the road. 70 million businesses already use Facebook pages, 5 million advertise on Facebook, of which only 1 million are in emerging markets.
Across all its markets, ARPU is only $4.23, or less than a quarter of U.S./Canada levels. Applying the domestic ARPU across the total user base (MAUs) suggests quarterly sales of $33 billion, or more than four times current levels.
Of course, it will take many years for the global consumer base to spend anywhere near the levels of U.S. consumers. Yet it remains a lucrative avenue for Facebook and advertisers.
In this respect, Facebook is a global growth story. Investors wanting to invest overseas could essentially stay close to home and acquire Facebook stock to do so. A weaker U.S. dollar (which is likely since it has rallied for a number of years straight now) will also boost overseas revenue.
Bottom Line on FB Stock
One problem with investing in Facebook currently is that the shares have continued to rally. Prior to Friday’s “tech wreck,” FB stock was bumping right against its high of $154.71 over the past year. Based off the consensus estimate of $4.90 for this year, it now trades at a forward P/E above 30.
The 2018 multiple (expected earnings of $6.08) of 25.4x is much more palatable, but Facebook said to “expect that our ad revenue growth rates will come down meaningfully over the course of 2017.” So will its payments and related fees.
Facebook is also increasing investments to prepare for the next round of user growth. Expenses are expected to jump 40% to 50%, and capital expenditures could reach as high as $7.5 billion this year.
Facebook has been one of the best investments in the entire stock market in recent years. Its five year total return was 494%, which bests the stock market by a very wide margin (90% return over the same period) as well as archrival Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) (249%) and Amazon.com, Inc. (NASDAQ:AMZN) (372%). Only Netflix, Inc.(NASDAQ:NFLX) has done better (up a whopping 1,684%)
If FB stock continues trending down, say closer to $100, I’d likely buy more.
For now, I plan to hold on to what I have already accumulated.
As of this writing, Ryan Fuhrmann owned shares of FB and GOOGL stock.
