Facebook (NASDAQ:FB) has shown extremely impressive growth over the past few quarters. The stock has been one of the best performers in the market. The market participants doubted the ability of Mark Zuckerberg to lead such a big company at the start and the stock suffered heavily. However, his intelligent moves and the impressive growth in earnings have convinced the market that Mark can run a business. As a result, the stock has outperformed its industry peers such as Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL) and LinkedIn (NYSE:LNKD) by a massive margin. Let's look at the performance of the company and a recent deal that can prove to be vital for the company in the long run.
A Glance at the Earnings
The most impressive figure in the earnings announcement is the ads revenue of about $7 billion, growing by 63.2% compared to the last year. The company reported revenue of $7.8 billion for the last year which has increased by 55% compared to the previous year. Social media stocks are often compared by their revenue per user. This variable is important, because it represents the commercial value of their users. Facebook is earning the highest revenue per user among industry peers. For making the comparison easier, I present quarterly results of average revenue per user of the industry. Facebook earned $2.11 per user while Twitter (NYSE:TWTR) and LinkedIn earned $1.01 and $1.97, respectively.
As we all know, mobile is the future of Facebook and the company is focusing all of its efforts on mobile; it is important to look at the progress of mobile as well. The mobile revenue amounted to 53% of Facebook's total revenue in last year, a massive shift in the total revenue mix of the company as mobile revenues accounted for just above 40% of total revenues at the end of the second quarter of the last year. To further the growth of mobile, the company recently announced that it is working with a small number of advertisers and publishers to test its own mobile ad network. The new platform will act as an intermediary between the advertiser and app publishers. According to research by Gartner, the mobile advertising spending will reach $18 billion in 2014, up from estimated $13.1 billion in 2013.
WhatsApp Acquisition: What Will it Bring to Facebook?
Facebook has agreed to buy WhatsApp for $19 billion - first of all, let's look at some of the details of the deal and then I will explain its benefit or the drawbacks for the company. Facebook is paying $4 billion in cash and $12 billion in stock for WhatsApp - a further payment of $3 billion will be made in the shape of restricted stock that will vest over the period of four years. It is a massive deal and one cannot help but think that Facebook is overpaying for WhatsApp. However, it looks like the company is ready to pay whatever it takes to capture the communications and mobile market.
The structure of the deal usually shows the expectations of the parties - the fact that the deal is more than 80% paid for by the stock of Facebook shows that WhatsApp shareholders strongly believe that Facebook stock will be worth more in the future. If the selling company does not believe in the growth prospects of the buying company, then they will always insist on a cash deal. At the same time, the issuance of over 180 million new shares by Facebook will bring substantial dilution. Furthermore, restricted stock will also vest over the next four years adding more shares to the total count and further diluting the stock - No wonder FB shareholders are not happy with the deal and the stock was down in post market trading. WhatsApp has more than 450 million users - Facebook is paying $42 per user to WhatsApp, more than what it paid for Instagram ($33 per user). The deal is extremely favorable for WhatsApp shareholders and employees; even a failed deal will net them about $2 billion as Facebook has made a commitment to pay $1 billion in cash and $1 in stocks if the deal falls through.
Usually expensive deals are justified by the revenue potential of the units being bought; however, as Facebook has promised not to advertise on WhatsApp and the mere $1 per year fee of WhatsApp (which is not applicable for the first year), does not endorse such high price multiples. It is still unclear where the revenues will come from. The deal looks more like an effort to get into the mobile communications market than increasing revenue in the short term. However, in the long term, this might bring substantial benefits to the company as WhatsApp is growing at an exceptional rate (1 million new users a day). WhatsApp will continue to operate as an independent app and there will not be any major changes. The acquisition puts Facebook in the mix as it was mainly being used for content and the users preferred WhatsApp and other such applications for communication. Furthermore, the acquisition of WhatsApp brings younger users to Facebook.
The WhatsApp deal is worth more than what Facebook raised with its IPO - the massive size of the deal has surprised a number of people. However, I believe the company has shown its intent with this deal. If the deal goes through, Facebook will become a major player in the mobile communications market. Once the company takes hold of the market and the growth in new users continues, the revenue growth opportunity will become massive. The subscription fee alone will bring in substantial revenues for the company, and I believe at some point in the future, Facebook will start to advertise on WhatsApp. For WhatsApp users, a yearly fee of even $10 will be cheaper compared to the SMS charges by the telecom companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.