Since its founding in 2004, Facebook (NASDAQ: FB) has grown into a global social media giant with 1.01 billion daily active users and 1.55 billion monthly active users. A new public search option for users has increased searches to 1.5 billion per day, more than the number of daily searches on Google (GOOG) and Twitter (TWTR). Another successful quarter has boosted the company’s market capitalization to $301.75 billion, with Facebook joining an exclusive club of companies with a market cap of over $300 billion that includes Apple (AAPL), Google, Microsoft (MSFT), Exxon Mobil (XOM), Amazon (AMZN) and Berkshire Hathaway (BRK.B). Facebook CEO Mark Zuckerberg continues to focus on optimizing the user experience to attract and retain users while leveraging advertisements from businesses to promote revenue growth for Facebook, and making strategic acquisitions for a seamless cross-platform user experience.
On November 4, 2015, Facebook reported third quarter financial results for the three months ended September 30, 2015. The company had total revenue of $4.50 billion, up 41% from $3.20 billion in 2014. Total revenue growth was largely tied to a 57% increase in advertising revenue (excluding the impact of foreign exchange rate changes in the quarter). Advertising on the company’s mobile applications accounted for about 78% of advertising revenue, 12% higher than in 3Q14. Facebook reported an increase in GAAP income from operations from $1.40 billion in Q3 2014 to $1.46 billion in Q3 2015 despite a 12% year-over-year drop in operating margin from 44% to 32% in the current quarter due to a 68% jump in total costs and expenses, partly tied to acquisitions. Non-GAAP income increased from $1.82 billion to $2.41 billion in Q3 2015. For 3Q15, Facebook reported GAAP net income of $896 million, up 11% year-over-year from $806 million in 3Q14, and GAAP earnings of $0.31 per share, up a cent over the year ago quarter. Non-GAAP net income was up strongly to $1.63 billion from $1.15 billion in Q3 2014. Facebook beat 3Q15 consensus analyst estimates of revenue by 3% and earnings by 10%.
The day after the earnings report, on November 5, 2015, Facebook shares climbed as high $110.62 before settling up 5% at $108.76 for a new record high. Year-to-date, the company’s shares are up about 37% at $107.10 as of market close on November 6, 2015. Shares are trading slightly below the high-end of the company’s 52-week range of $72.00 – $110.65. Several research firms maintained Facebook with an Outperform or Overweight rating. Analyst cited bullishness tied to mobile usage growth, secular platform growth, strategic advertising solutions and revenue growth from Instagram. The seven firms that took action have an average consensus analyst price target of $126.43 for Facebook, representing upside potential of 18%. The recent spike in shares gives Facebook a price-to-earnings ratio of 108x as of 11/6/2015, well above most of the company’s technology competitors. Further, analysts believe Facebook could again beat estimates for full-year earnings through the fourth quarter holiday season which could boost its share price over the next three months.
Here are the quarter’s highlights:
Facebook expanded its partnerships with music services Spotify and Apple Music. Facebook users can now listen to 30-second song previews in their newsfeed. Users will then have the option to download or purchase songs directly from the digital audio streaming sites or applications. As a result, Facebook users don’t have to leave the platform for their music, and downloads through the app will garner a share in music sales.
Facebook entered into a new partnership with the Royal Bank of Scotland whereby about 100,000 bank employees will switch to ‘Facebook at Work’ – a specialty business platform that was launched in response to the company’s normal site being banned at many workplaces. Facebook at Work allows the company to capture the working audience through a closed and more secure Facebook experience with coworkers.
In the next couple of weeks, Facebook is expected to launch its independent news application – Notify – that will immediately alert users as news stories break. Notify will push material from news leaders such as Billboard, CBS, CNN, Comedy Central, Mashable, Vogue and the Washington Post. Facebook is also launching new tools for business owners to improve marketing such as sending location-specific advertisements to users that can differ for each storefront. Business owners will also be able to gather more local information through an ‘Insights’ tab that offers key information such as foot traffic, community demographics and advertisement views. Facebook is testing an advanced version of its marketplace purchasing option that resembles the classified advertisement website Craigslist but will be connected based on location.
Facebook’s success in Q3 2015 was pushed by a 17% increase in daily active users and a 14% increase in monthly users. Instagram’s video integration with Facebook and other social media outlets has helped grow the company’s advertisement audience by 400 million users, outpacing social media rival Twitter.
Facebook now has 8 billion video views from over 500 million users per day, more than double the video views from 1Q15. In the United States and Canada, Facebook earns $10.49 in average revenue per user (ARPU) but only $1.39 in revenue per user in the Asia-Pacific region, with a total global average of $2.97 in revenue per user. To increase ARPU, CEO Zuckerberg has placed a strong emphasis on growing the company’s presence in 19 emerging markets including India and Sub-Saharan Africa; the company is also actively trying to provide 2G internet speeds in several other countries.
In countries with slower internet speeds, Facebook offers a simplified website where video advertisements are displayed as slideshows. Even though Facebook is currently banned in China, home to about 1.4 billion people, CEO Zuckerberg is actively courting the country’s leadership to find a common solution. Emerging markets represent another 4 to 5 billion potential users which is a huge growth opportunity for Facebook.
To attract users in developed regions with a more immersive user experience, Facebook continues to spend on research and development on artificial intelligence and virtual reality. Bullish analysts have a high share price target of $146 for Facebook which represents 36% upside potential in the short term.