Promising Mobile Signs Send Shares Of Facebook Higher

| About: Facebook (FB)

Shares of Facebook (NASDAQ:FB) rose more than 15% in after-hours trading on Tuesday. The world's largest social networking website reported its third-quarter results after the market close.

Third-Quarter Results

Facebook reported third-quarter revenues of $1.26 billion, up 32% on the year. In constant currencies, revenues were up 38% on the year. Revenues beat analysts consensus of $1.23 billion. Advertising revenues rose 36% to $1.09 billion. In constant currencies, advertising revenues rose some 43%. Payments and other fees rose 13% to $176 million, but were down 9% on the quarter.

The company reported non-GAAP operating income of $525 million, up 8% on the year. GAAP operating income fell 9% to $377 million. Facebook reported a net loss of $59 million, or $0.02 per share. Non-GAAP net income rose to $311 million, or $0.12 per diluted share. Non-GAAP earnings per share beat analysts consensus by a penny.

The number of monthly active users rose 26% to 1.01 billion users. Recently Zuckerberg already announced that the company passed the 1 billion barrier. The number of mobile active users rose 61% on the year to 604 million. The mobile user base was up 11% on the quarter. CEO and founder Mark Zuckerberg commented on the results:

As proud as I am that I am that a billion people use Facebook each month, I'm also really happy that over 600 million people now share and connect Facebook every month using mobile devices. People who use our mobile products are more engaged, and we believe we can increase engagement even further as we continue to introduce and improve our platform. At the same time, we are deeply integrating monetization into our product teams in order to build a stronger, more valuable company.

Segmental Information

U.S. and Canada

The number of monthly users rose 7% to 189 million. Revenues in the continent rose from $482 million to $637 million, up 32% on the year. Average revenue per user rose to a record $3.40.


The user base in Europe rose 15% to 253 million. Revenues rose 17% to $341 million, boosting ARPU to $1.37 per share. Average revenue per users is down from a peak of $1.60 in the fourth quarter in 2011, on the back of a weaker advertisement market.


The Asian user base rose 41% to 277 million. Revenues rose 48% to $154 million, boosting ARPU to a record $0.58 for the continent. Obviously ARPU are still far off levels generated in Europe, and in particular North America.

Rest of World

The user base in the rest of the world rose 39% to 288 million. Revenues rose 67% to $130 million, boosting ARPU to a record $0.47.


As a result of the public offering, Facebook ended its third quarter with $10.4 billion in cash, equivalents and marketable securities. The company operates without any debt, for a comfortable net cash position.

For the first nine months of 2012, Facebook generated revenues of $3.50 billion. The company reported a net loss of $11 million, or $0.01 per share. Non-GAAP income net income rose to $890 million, or $0.36 per share. The company is on track to report annual revenues of around $4.8-$4.9 billion. Net income will come in around the break-even point, while non-GAAP net income could total $1.2 billion.

Factoring in a 13% increase in after hours trading, the market values the firm at $47 billion. Excluding the net cash position, the market values operating assets at $36.5 billion. This values the firm at 7.5 times annual revenues and 30 times non-GAAP earnings.

Facebook does currently not pay a dividend.

Investment Thesis

Since the public offering in May shares have lost half of their value. Shares initially jumped from an offer price of $38 per share to highs of $45, but quickly fell below the offer price. Shares traded at lows around $19 during yesterday's regular trading session. In after-hours trading, shares recovered to $22 per share. The company has rapidly grown revenues from $272 million in 2008, to an estimated $4.8 billion in 2012. The company reported a $56 million loss in 2008 and has been profitable in each year ever since.

As many commentators have pointed out, the key for Facebook is to monetize all the traffic from mobile devices. Given the smaller displays, the room for advertisements is much more limited. In a counter attempt, Facebook attempts to get the users more engaged on mobile applications, offering advertisers better options and greater value.

While the user base growth is likely to level off in the near to medium term, Facebook continues to boost its ARPU, except for Europe. If all global users generate the same ARPU as North America of $3.40 per user, the company could generate quarterly revenues of $3.5 billion.

At prices in the low twenties, there is some margin of safety for current and potential investors. The company streamlined operations to target the company's mobile challenge. In the latest quarter, some 14% of advertising sales came from mobile devices, a ratio much higher than anticipated by many analysts. In general, the number of ads rose 27% on the year, in line with user growth. Advertisement prices rose 7% on the year. Some of the new tools geared toward better mobile monetization were "Sponsored Stories" and "Promoted Posts."

With many insider lock-ups expiring in the coming weeks, a pullback to the high teens might provide long-term investors with a good entry level. Optimistic signs about the company's monetization challenges could be the start of a more sustained recovery.

Disclosure: I 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.