Facebook (NASDAQ:FB) remains the best story in the global internet and media space as the company's core social network segment continues to gain traction in both monetization and engagement. Although the developed market remains FB's cash cow region, developing markets such as ASEAN could potentially deliver multi-year upside driven by rising ad spending on the back of a growing consumer base. Additionally, online video, Messenger, virtual reality and financial services each have the potential of surpassing the company's existing social networking segment, giving investors plenty of long-term options when it comes to the future growth of the firm.
As long as the user is there, Facebook will find a way to monetize its asset and it is certainly remarkable to see engagement reaching an all-time high of 66% (measured by DAU/MAU) and MAU growth saw the fastest acceleration in the past six quarters. Three million advertisers in total (with 200k in Instagram) is certainly impressive and average spend continues to rise as they gravitate toward a more sophisticated ad platform that could deliver more attractive ROI relative to the traditional media. Best of all, Facebook is able to execute on all fronts while keeping the expenses in-line. Although management downplayed the Oculus expectation and payment revenue continued to decline, I see these to be minor setbacks to what social VR and mobile payment/financial services could potentially bring to FB in the future as it leverages its 1.5bn+ mobile MAU base. The +8% post-earnings reaction is a function of two things: 1) solid FB earnings and 2) fund flow from Apple (NASDAQ:AAPL) sellers. As long as we continue to see iPhone weakness in AAPL, fund managers will continue to shift their portfolio towards FB. This will clearly support FB in the near-term, but a negative on AAPL. I remain bullish on FB in the wake of its earnings.
Q1 earnings were solid across the board with revenue of $5.38b and EPS of $0.77 both beat consensus driven by mobile, which now accounts for 82% of the company's total ad revenue. Payment revenue once again disappointed but investors should keep an eye on Tencent (OTCPK:TCEHY) and Alibaba (NYSE:BABA) that leveraged their user base to build their own internet finance division, now redefining the way how Chinese consumers interact with finance. In the case of BABA, its Ant Financial is currently valued at $60bn and it is an entirely internet-only bank. In short, I expect this segment to become one of the most attractive segments in FB's product portfolio once mobile messenger and O2O take off and I see FB's payment platform to be a good foundation for the company to eventually enter internet finance. Worth recalling that FB already allows P2P money transfer and I believe this could gradually expand to P2P lending, online payment, financial services and/or mobile payment.
MAU growth of 15% and DAU growth of 17% remains the best-in-class and the 66% engagement level can be the envy of many social media platforms. Mobile-only MAU of 894m reinforces the view that FB's mobile monetization capability still has attractive upside in the near term as FB leverages its sticky network and heavily engaged platform. Although MAUs in North America (+6%) and Europe (+8%) are decelerating, Asia (+20%) and RoW (+18%) appear to be picking up the slack.
Management downplayed the expectation on VR, but I remain a long-term bull on the VR's prospect. In my view, VR is the next major computing platform but the social element is equally important where the user can be fully immersed in the virtual world and such interaction is taking social networking to the next level. FB is well positioned for this trend with the Oculus headset and the upcoming VR controller that is scheduled to roll out later this year.
As for Messenger, expanding mobile payment to include services such as hotel/air booking, taxi booking, and entertainment are the most likely route that FB will pursue. Keep in mind, Uber (Private:UBER) is already partnering with FB Messenger so extending this partnership to include online travel agencies is a logical extension. Enhanced payment features will ultimately result in a superior user experience for the users, but the key is for FB to charge a reasonable transaction cost (most likely around 50bps) that will drive the long-term growth of its payment revenue.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.