Facebook Has No Plans of Holding Back on Investments

According to a MarketsnMarkets report on Cross-Platform & Mobile Advertising Market, the global mobile advertising market is projected to grow 38% annually over the five-year period from 2013 through 2018. The industry is projected to grow from $15.13 billion in 2013 to $76.57 billion in 2018. The growth is driven by the emerging markets of Middle East, Africa, and Latin America and is attributed to the continued increase of smartphone usage and the increased integration of cross-device platforms that targets audiences on multiple devices such as desktops and mobile devices.

Facebook’s Financials
Social media giant Facebook (Nasdaq: FB) continues to attract mobile advertisers to drive growth. For the recently ended third quarter, Facebook saw revenues grow 58% over the year to $3.2 billion, ahead of the Street’s forecast of $3.1 billion. EPS of $0.43 was also ahead of the market’s forecast of $0.40 for the quarter.

By segment, advertising revenues grew 64% over the year to $2.96 billion and revenues from payments and other fees increased 13% to $246.0 million.

Mobile ad revenues now account for 66% of ad revenues and have grown from $0.88 billion to $1.9 billion in the quarter. Desktop ad revenues increased 11% over the year. Ad revenue increases have been attributed to efforts such as video ads and improved layout. According to an eMarketer report, Facebook accounted for nearly 6% of the global digital advertising market in 2013 and is expected to increase its share to 8% this year.

Facebook’s ad revenue increases are not attributed to improved volume. During the quarter, ad impressions actually fell 56% due to lower ad volumes on mobile devices. However, the average price per ad increased 274% over the year translating to a growth in average revenue per user from $1.72 a year ago to $2.40.

Facebook ended the quarter with monthly active users growing 14% to 1.35 billion and daily active users improved 19% to 864 million.

Other mobile statistics continue to deliver impressive results. Mobile-only monthly active users grew 80% over the year to 456 million and mobile monthly active users increased 29% over the year to 1.12 billion. Mobile daily active users grew 39% over the year to 703 million.

Facebook expects to end the current quarter with revenues of $3.6 billion-$3.8 billion compared with the market’s projections of $3.7 billion.

Facebook’s Rising Costs
Facebook may have delivered strong results for the recent quarter, but they forecast significant increases in spending in 2015. Facebook projected that their costs could grow by nearly 50% this year and 75% in the next year as they continue to invest in people to support high cost acquisitions like WhatsApp and Oculus.

Facebook bought WhatsApp for an estimated $22 billion. In return, they got a company that has a user base of 600 million, revenues of $10 million, an operating loss of $40 million, and a net loss of $138 million. Turning it around will be a challenge considering that WhatsApp’s current avatar involves no advertisement or premium service revenues. Facebook wants to increase WhatsApp user base to over a billion and is evaluating other monetization opportunities such as enabling voice calls over the web.

Additionally, virtual reality product Oculus may not be profitable for some time. Oculus’s products involve high development costs and the technology is still comparatively nascent requiring higher R&D effort. They have so far shipped nearly 100,000 Rift developer kits to more than 130 countries.

Facebook’s New Offerings
Facebook also plans to continue investments in other activities such as rolling out highly targeted ads that may or may not deliver the expected financial results. Earlier this summer, they announced the acquisition of LiveRail, a video ad-tech start-up, for an estimated $400 million-$500 million. LiveRail’s products help marketers deliver more than 7 billion video ads to consumers per month. LiveRail was estimated to be operating at a revenue run rate of more than $100 million in 2013. The acquisition will help Facebook improve their video ad offering.

Facebook wants to improve the cross-platform advertising on their network and recently opened their Audience Network to all developers and publishers so that more than 1.5 million advertisers will be able to offer their campaigns across mobile and desktop devices.

As part of some of their developer-focused offerings, Facebook recently announced the open sourcing of a software framework Osquery. Osquery would let users see their operating system as a relational database and thus see how their OS is functioning. It will let operating systems be viewed as SQL tables so that developers will be able to run queries to discover bugs, troubleshoot and even discover malicious activity.

Facebook is also investing in regional expansion and recently tied up with Airtel in Zambia to launch the Internet.org app in the country. Through the tie-up, users will be able to get free data access to basic Internet services for health, education, employment, and communication. Facebook plans to launch this service in other similar regions so that these populations can experience the benefits of the Internet.

Their stock is trading at $75.76 with a market capitalization of $211.21 billion. It touched a record high of $81.16 last week. The market is not too worried for now as it is hopeful that Facebook will still find several ways of monetizing and will continue to improve margins in other services. WhatsApp, especially, can be monetized very well with a subscription service and with advertising, as I discussed before.