Facebook (NYSE: FB) blew out expectations in the second quarter, reporting non-GAAP EPS of $0.42 before share-based compensation and related payroll tax expense and income tax adjustment. The result compared against the analysts' consensus expectation for $0.32 a share. The earnings beat was by 31%, and the stock took off as investors realized how spectacular the quarterly performance was. The traction in revenue and the operating leverage we had all once only dreamed of is actually playing out, and the opportunity for exponentially greater benefit to the bottom line is exciting to contemplate.
Revenue increased 61% in Q2 year-to-year, to $2.91 billion. To put that accomplishment into perspective, the company made $3.27 billion in the first two quarters of 2013, so it has halved its time spent to make as much money, and it has done so in just a year's time. Overall revenue growth is astounding, but its sources are even more impressive. The company achieved a 67% increase in revenue from advertising (I don't take foreign exchange out, but if we did, revenue was 65% higher here). Pay attention now: mobile advertising revenue represented 62% of total advertising revenue, versus 41% in Q2 2013. Mobile advertising revenue grew by 151% year over year. That is quite an accomplishment, and illustrates how well Facebook has managed the transition of computing to mobile.
Advertising data by user geography shows that despite modest user growth in its more mature U.S. market, there's a lot of juice to squeeze out of the massive user base. This is something I have been pounding the table about dating back to when many had given up on Facebook and driven the stock down below $20. Daily Active Users in the U.S. and Canada increased by just 1.3% sequentially over Q1 and 7.0% over Q2 2013, but advertising revenue from U.S. and Canada increased 13% sequentially and 63% from the prior year quarter. Advertising revenue per American and Canadian user was up 58%. That is called monetization, and Facebook is getting really good at it.
The company will continue to improve monetization because it is working hard and carefully at understanding how to better accomplish it in mobile and through improved advertising. Mobile daily active users were up 7.4% sequentially and 39.4% against the prior year period. As this group of users grows and as the company better monetizes mobile, the fruit of its efforts should be astounding. Through its conference call, management clearly showed keen interest in better engagement of users through interesting advertising. It conveyed to us that advertising content is approaching organic content in terms of appeal. This is something to look toward in the future across companies, as long gone are the days of blatant banner ads and annoying popup ads, and in their place is engaging content advertising. Jim Cramer, my former RealMoney.com colleague, said on his TV program Mad Money that he thought Facebook was only just realizing its pricing power in advertising. I agree!
Facebook boasted of its importance in the digital life of Americans, as it represents 40 minutes of an American's digital day; that's from the 9 hours a day people tend to spend connected. In terms of mobile use, people spend about 1 in 5 minutes on a Facebook service, according to CEO and founder Zuckerberg. The soon to be richest man in America saw this as a sign of room to grow, but I'm not sure any one service could have more share than that. Obviously, the opportunity for advertising income and for global usage is clear through that illustration though.
As its CEO pointed out, Facebook also continues its work to increase Internet usage globally. Mark Zuckerberg indicated that through Facebook's work with Internet.org, it had helped 3 million people in the Philippines and other countries to get internet access. Of course, we often hear of Google (NASDAQ: GOOG) (NASDAQ:GOOGL) and Facebook and their interest in increasing internet usage via wild ideas like through the usage of drones and satellites. It's because of their importance with regard to internet use per connected individual. The more people connected translates into more people using Google and Facebook, more so than say a Seminal Event, a creative news aggregator and blog under development by a novice techie. So as people are connected to the internet through computers and mobile phone technology, they are becoming users of Facebook as well. As users of Facebook, they are being engaged by interesting advertising, and the revenues are rolling in.
I liked Cramer's valuation model last night. He joked about its complexity, because it was so simple. He used a PEG value to target upward of $90 for the stock. Let me have a shot at this. If we average the analysts' EPS consensus figure for 2014 with the 2015 estimate, we get a rough estimate of Facebook's earnings for the next 12 months of $1.81. The P/E on that, using Friday's closing price, is 41.5X. Analysts estimate 5-year EPS growth for Facebook at 37.15%, but growth from 2013 to 2015 should average 51.5%. That means we have a long-term PEG ratio of about 1.1X, and a PEG of 0.8X on the 2-year growth.
In other words, this stock is astoundingly cheap given the growth it should achieve without breaking a sweat. I'll get into why I think the stock is so discounted in my next article, so feel free to follow my column. What you need to know right now is that even though Facebook climbed nearly 10% this week, it should gain another 23% roughly to reach $92 a share by this time next year, at least. I got there by bringing the stock price back down in line with its long-term growth outlook (P/E from 41.5 to 37.15), and then grew it at 37.15% to get it to a conservative target price of $92. That's about where Cramer had it pegged as well.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.