Facebook: Driving Average Revenue Per User

Jul.30.14 | About: Facebook (FB)


According to Facebook's most recent results, the average revenue per user stood at about $2.24 globally. In the U.S., which is FB's strongest revenue contributor ARPU was $6.44.

WhatsApp boasts one of the best engagement levels in social media, with 50 billion messages exchanged per day. This acquisition should generate around $1 billion in revenue at $0.99/subscriber.

Facebook is expected to make roughly $1 million to $2.5 million per day from video display ads.

Facebook (NASDAQ:FB) is finally becoming one of the hottest stocks in the market today, following a successful campaign in recent quarters. The company has consistently delivered impressive results, and the most recent quarter showed just how mobile has become as crucial, as earlier predicted by several analysts.

Facebook is now up 223% over the last two years and 111% in the last twelve months. This uptrend comes after the company experienced what many feared would be the worst IPO in recent years, as the stock plunged from $45 per share to trade at $17.55 in 2012. However, the price is now hovering at just about twice the company's IPO offer price of $38 per share.

Catalysts that could spur FB growth

WhatsApp user growth

Over the last two years, Facebook has been making a lot of acquisitions in a bid to cement its position as the leading social networking company. Most notably, the company acquired WhatsApp in February this year for a whopping $19 billion, raising questions over the valuation of the deal. However, it is quite clear that in order to clearly claim a strong foothold in mobile, Facebook needed more than just its mobile app and the FB messenger.

The acquisition of WhatsApp is seen as a long-term goal aimed at increasing Facebook's presence in mobile, as well as in some countries like China, where the social media giant faces obstacles. WhatsApp membership is also increasing rapidly, as its Monthly Average Users, MAU, doubled last year to 430 million. That number surpassed 500 million last month and continues to grow, which means in a couple of years, it could potentially reach one billion users.

WhatsApp also boasts one of the best engagement levels in social media, averaging more than 50 billion messaging exchanges per day, and ~100 million videos and ~700 million photos shared daily. This indicates WhatsApp's potential for monetization, if another model is introduced. Currently, the company's revenue model remains tepid, locking in only $0.99 per subscriber, all be it after one year of free trial. The good news is that the increasing number of MAUs indicates that those who do the trials tend to subscribe for the annual premium fee.

Nonetheless, in order to realize the value FB placed on WhatsApp, the other modes of monetization would be crucial. For instance, assuming the $0.99 per year subscription fee is paid by one billion subscribers, that equates to just $1 billion in revenue, which is quite low compared to what Facebook paid to acquire the mobile messaging app company.

Therefore, an ad-supported revenue model would eventually be the answer to the question of valuation. According to Facebook's most recent results, the average revenue per user [ARPU] stood at about $2.24 globally. In the U.S., which is FB's strongest revenue contributor, ARPU was $6.44.

In general, WhatsApp has a huge potential for monetization, and Facebook could benefit immensely in the coming years, as it adds another explosive revenue stream to its revenue model.

Mobile monetization

When Facebook went public, it invested a lot in monetization, and truly, this is beginning to pay up. Facebook mobile monetization has been impressive over the recent past, making it one of the best in the market.

Only Google (NASDAQ:GOOG) (NASDAQ:GOOGL), which accounts for roughly 50% of the mobile ad revenue, tramps Facebook. However, analysts predict that Google's share of the market could decline substantially this year as Facebook continues its rapid growth in mobile.

In the most recent quarter, Facebook mobile revenues grew by 153% y-o-y and 24% sequentially to account for more than 60% of the company's overall revenues. The company's mobile revenues beat analyst estimates convincingly, coming at $1.66 billion, compared to the $1.58 billion street estimate.

Based on the current revenue growth rates, analysts estimate that the company could lock in more than $12 billion in revenue in 2014 (equating to roughly $7 billion in mobile revenue). This is a massive jump from last year's $3.1 billion. In 2015, the figure for mobile revenue could reach double digits (billions). This means that the company could soon approach a double-digit figure for ARPUs, especially in the U.S.

This is a massive catalyst for the company's stock price, especially given the fact just over a year ago, the big question was whether or not the company would be able to monetize its massive user base. The company seems to have found a solution for that challenge.

Auto-play Video ads

Facebook's auto-play video ads start playing automatically for about 15-minutes when users land on news feeds. The 15-min clips are akin to TV commercials, and are sold in a similar fashion. Facebook is trying to encroach on the gigantic $70 billion-a-year video advertising (TV) by bringing the experience online.

The company's massive user base could also play a huge role towards luring advertisers to switch to the digital platform in relaying their video adverts.

According to initial estimates, Facebook is expected to make roughly $1 million to $2.5 million per day from the ads. In a few years, the company could easily be making billions worth of video ad revenues.

Analysts also view Facebook's latest move as a step towards challenging Google's status in digital advertising. Google's YouTube runs a similar ad network, with ad videos that auto-play upon opening a video clip.

Nonetheless, while the battle continues to heat up, the most important aspect may not be how Facebook's auto-play ad videos compete with Google's YouTube ad videos, but rather, the implication on Facebook's revenue model.

Facebook's ARPU is one of the main performance measures of the company; increasing the channels of revenue generation can only serve to raise the ARPU. The auto-play video ads are a great addition to Facebook's revenue model, and will definitely help improve ARPU. This is likely to boost investor sentiment towards the stock, as the company continues to successfully add revenue streams to its revenue model.


Facebook's recent results suggest an upward trending performance both annually and sequentially. If this continues for the next two quarters, then we could have payments revenue of just under $1 billion (the current run rate is about $235 million per quarter).

Desktop revenues could breach the $4 billion mark, based on the current run rate of about $1 billion per quarter, while mobile advertising revenues could clock $7 billion. This equates to a total of about $12 billion in revenues.

Now, Facebook is attracting positive market sentiments, which is good for the valuation of the stock. Currently, the company is trading at about 19.45x in P/S and 36.64x in forward P/E (Dec 2015). Based on the targeted revenue of about $12 billion for the year 2014 and the current P/S multiple, the target price for this year is about $90 per share.

That is the ideal valuation for Facebook at the end of the year. However, given price momentum and the explosive outlook, which promises sustainable growth, investors could easily push the stock to above $100 per share, valuing the stock at roughly 21.7x in P/S multiple.

WhatsApp, auto-play video ads and rapid mobile monetization are magnificent sources of investor optimism as the company looks set to cement its place in social media. Initially, it was just about connecting people, but now, the time to make money has arrived.

Disclosure: The author is long FB. 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.