Valuations can get a bit high in the tech world, particularly in the Internet industry and Facebook Inc (NASDAQ:FB) stock is no stranger to this phenomenon. Sure, Facebook stock’s price-to-earnings multiple is not as high as some of its peers. But trading at 87 times its current earnings, the company still has a lot of growth to deliver. Where can Facebook find such growth?
Facebook Stock: Compelling Growth Story
Its core business is a good place to start. Despite being the largest social media platform in the world, Facebook’s userbase is still growing at an impressive pace. In December 2015, Facebook’s monthly active users (MAUs) increased by 14% year-over-year to $1.59 billion. (Source: “Facebook Reports Fourth Quarter and Full Year 2015 Results,” Facebook Inc, January 27, 2016.)
Mobile has been the key battlefield for Internet companies. People are spending more time than ever on their smartphones and tablets. In fact, if you listen to any Internet company’s earnings conference call, you could almost always find the word mobile being mentioned more than a few times.
Luckily, Facebook has been gaining mobile users. In December 2015, mobile MAUs surged 21% year-over-year to 1.44 billion. There are also a lot more people using Facebook exclusively on mobile devices. Mobile-only MAUs climbed more than 56% year-over-year to 823 million. (Source: “Earnings Slides,” Facebook Inc, January 27, 2016.)
Of course, user growth is just the start. To really create value for investors, Facebook needs to monetize on its growing userbase. So far, results have been pretty good.
Advertising is the no. 1 revenue source for Facebook. So let’s take a look at how much ad revenue each user can bring to the company. Facebook’s latest worldwide ad revenue per user was $3.60, representing a 37% improvement from the year-ago period.
Such improvement in monetization is no doubt a good thing, but there is still a lot more to be done. For instance, average ad revenue per user differs substantially across different regions. In the U.S. and Canada, each Facebook user brings $12.89 of ad revenue to the company. That number is dramatically lower in other parts of the world: $4.36 in Europe, $1.57 in Asia-Pacific, and $1.20 in the rest of the world.
Overall, a growing userbase and improved monetization led to solid top-line growth for the social media giant. For full-year 2015, Facebook increased its revenue by 44% to $17.93 billion.
But then again, since Facebook is so huge, its growth could be slowing down at some point. While China could represent a potential big market for the company, it’s still uncertain if Facebook would eventually enter the country. The company will need other growth drivers in the near term.
The good news is that Facebook has planned way ahead of time. In 2014, the company spent $2.0 billion to buy Oculus VR—the maker of virtual reality headset “Oculus Rift.” The acquisition is about to bear fruit. Oculus unveiled its VR headset at this year’s Consumer Electronics Show in Las Vegas. Consumers can pre-order it for $599.00 and delivery starts today (March 28).
There are already indications that the device is going to be a big hit. In just minutes after the device became available for pre-order, the first batch of Oculus Rift headsets were sold out. (Source: “First Oculus Rift Shipment Sells Out Despite $599 Price Point—New Preorders Now Shipping Late,” Venture Beat, January 6, 2016.)
Also, Oculus Rift won’t be Facebook’s only stake in the billion-dollar VR industry. Samsung’s “Gear VR,” which is already available, uses VR software built by Facebook’s Oculus team. By February 21, users have watched more than one million hours of video on Gear VR. (Source: “New Steps Towards the Future of Virtual Reality,” Facebook Inc, February 21, 2016.)
The Bottom Line on Facebook Stock
Facebook has a solid core business that is growing rapidly. The company is also deeply involved in virtual reality, which could be the next big thing. Add that up and you’ll see that even at today’s valuation, there could still be value in Facebook stock.