Facebook: Remember About WhatsApp And Messenger?

| About: Facebook (FB)

Summary

Facebook advertising revenue clearly indicates a future slowdown despite audience growth.

WhatsApp and Messenger are an important part of Facebook’s revenue growth, which is difficult to overestimate.

For those that argue Facebook multipliers are overstated, do not forget about profitability.

Just a heads-up, I don't have a trade position regarding Facebook shares. And I believe that to be an advantage in terms of analysis, because I am able to consider indicators impartially, without subliminal motivation to see positive or negative sides, even if they don't exist.

Correct me if I'm wrong, but the current share price on the stock market always reflects confidence in the future and not the assessment of the present. Therefore, the market's dynamics are more important than a stock's realized results for a given quarter.

Facebook (NASDAQ:FB) showed excellent results for Q4 2016, once again exceeding the analysts' expectations on key parameters. And yet, there are signs of slowing growth.

For Facebook, growth means the growth of its audience. And here, the acceleration clearly continues. According to the Q4 results, the number of Monthly Active Users (MAU) grew by 16.8% Y/Y, corresponding to the formed long-term trend, which assumes that MAU will reach 2 billion by the end of this year:

If we examine MAU growth dynamics by geographical regions, we'll get a more accurate picture. Namely, the registered growth of Facebook audience occurred solely at the expense of the Asian countries:

Audience growth in the United States, Canada and Europe (the most profitable segments) has been already slowing down for two quarters, which means we can talk about a developed dynamics. In other words, the further growth of Facebook MAU most likely will occur only at the expense of Asia - a region that is economically poorer than Europe and the United States, and, therefore, is not able to guarantee the same level of advertising revenue to Facebook.

If we examine the dynamics of Facebook's revenue growth by geographical region, this idea becomes more understandable. The revenue of "Asia-Pacific" segment has been declining for two quarters despite the rapid audience growth in this segment. Yes, I know that the annual growth rate of advertising revenues in this geographical region exceed 60%, but as I have already noted, the dynamics are important, and not merely the fact.

A further increase in Facebook's audience will not retain the revenue growth rate and, in the future, we will witness an imminent slowdown in advertising revenue.

But we should not forget that Facebook, besides a social network, is also a messaging company. The combined audience of WhatsApp and Messenger exceeds 2 billion and continues to grow. Better yet, its monetization has not yet started yet. During the earnings call on the quarter results, Goldman Sachs & Co. representative tried to clarify this situation by posing the following question to Mark:

....how do you think about WhatsApp and Messenger? And I'm wondering if there's different paths to monetization over time for each of these?

Mark only ambiguously highlighted the "differences in product philosophy", etc. He did not say anything about when the company was going to start monetizing these services. However, it is clear that they are working in this direction.

What potential revenues can WhatsApp and Messenger provide? Based on the statistics of two years ago, among the most successful messengers in the Asian region, the Japanese LINE (NASDAQ:LN) demonstrated the worst Average Revenue Per User (ARPU) at the level of $3.16. But even assuming that the ARPU of the global messengers WhatsApp and Messenger will make a similar amount, then together they will be able to generate more than $6 billion additional revenue a year. And, personally, I'm pretty sure that the actual result will be much better.

Talking about Facebook, no one can argue whether the company is good or bad, because the answer is obvious. The most interesting question is whether it is adequately evaluated on the stock market.

If you compare the key multipliers of Facebook with the largest company of the U.S. IT sector, at first glance, it seems that Facebook is overrated:

FB PE Ratio (<a href=

FB PS Ratio (<a href=

FB EV to EBITDA Chart

But let's not forget that only Facebook demonstrates operating margin above 50%:

FB Operating Margin (Quarterly) Chart

Also, if we compare only the year-to-date total returns of Facebook shares and the shares of its closest analogues in terms of the market capitalization, we'll see the dynamics, which generally correspond to the general level of value. Hence, in my opinion, it would be incorrect to argue that Facebook is a bubble.

FB Year to Date Total Returns (Daily) Chart

Conclusion

The growth of Facebook's advertising revenue as a social network will slow down in the future, unless the company finds a way to enter the Chinese market. However, the potential revenue of WhatsApp and Messenger is so huge that it is hard to overestimate it. Given that the current price level of Facebook shares is justified with unprecedented profitability, I believe that in the long term, we should expect continued growth of the company's capitalization.

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.

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