Facebook Diversifying Beyond Advertising

Facebook (Nasdaq: FB) is the undisputed king of social media. But it had a rough end to the year due to the uproar about fake news. The company was accused of spreading hoax news that was a big catalyst in getting Donald Trump elected as the US President despite all odds. Facebook may still not have figured out how to stop the fake news, but it definitely knows how to run a successful business and literally mint money!

Facebook’s Financials

Facebook’s Q3 revenues grew 53% over the year to $8.81 billion, ahead of the market’s estimates of $8.52 billion. EPS of $1.41 was also significantly ahead of the Street’s projections of $1.31 for the quarter. Facebook does not expect growth to remain at these levels in the current year. It warned investors of slowdown in advertising revenues and an increase in operating expenses between 47%-57% during the year. The decline in revenues is expected to come due to the ad load limits i.e. the total number of ads that Facebook can display to each user. The increased spending will be driven by investment in resources to support its other growth engines like video.

By segment, advertising revenues grew 53% to $8.63 billion and payments and other fees revenues fell 12% to $0.18 billion. Within the quarter, mobile advertising revenues accounted for 84% of the company’s advertising revenues, compared with 80% share a year ago.

Among operating metrics, Daily active users (DAUs) grew 18% to 1.23 billion with mobile DAUs growing 23% to 1.15 billion for December. Monthly active users (MAUs) grew 17% to 1.86 billion and mobile MAUs grew 21% to 1.74 billion.

For the year, total revenues increased 54% to $27.64 billion and diluted EPS grew 171% to $3.49.

Facebook’s Video Focus

After successfully implementing the mobile advertising strategy, Facebook is now focusing on its video advertising business. Earlier, the market was speculating that Facebook would enter long-form video with a service that could compete with Netflix. But during the results announcement, Facebook dispelled such suggestions. Instead, it is going to compete with Alphabet’s YouTube.

Facebook is said to be working on a video app for television set-top boxes including other devices like the Apple TV. But in terms of content, it will focus on shorter video content that will include premium content along with short videos, such as those that people produce for their friends and promotional content for businesses and celebrities. To make it easier for the users, it also rolled out a video tab that would store all videos on a single page.

Like YouTube, Facebook videos are available with features such as live streaming, 360-degree, and video through filters. The service is already attracting users and was recently used by the President Donald Trump to announce the US Supreme Court nominee Neil Gorsuch.

Facebook’s Oculus Issues

While it may be making strides on the video segment, it is facing some issues within the virtual reality segment. Facebook announced delays on the release of its Oculus Rift VR headset and touch controllers. Besides the delay, the business is not expected to be profitable for a while. And things got worse when earlier this week Facebook was slapped with a $500 million penalty for a copyright violation.

A Dallas federal court agreed that Oculus’s co-founders Palmer Luckey and Brendan Iribe had infringed on ZeniMax Media’s copyrights and trademarks for the development of Oculus products. The jury has already rejected allegations that Oculus stole trade secrets from ZeniMax, but it did find violations of copyrights, trademark, and contractual laws. Facebook plans to appeal the decision.

Facebook Marketplace

Last quarter, Facebook also made its big entry into e-commerce with the launch of Marketplace. Facebook called the Marketplace a convenient destination to discover, buy, and sell items as it allows both small businesses and individuals to expand market reach globally. The Marketplace initiative has been launched only in the United States, UK, Australia, and New Zealand and will expand globally based on the performance. Marketplace offers an attractive business model by allowing a third party partner to sell a merchant’s products for a commission. But it lacks some basic e-commerce features such as a wide range of products and availability along with governance. I think Facebook can easily fix that by purchasing eBay. It has already partnered with eBay to launch a shopping service on the Messenger app.

The market is happy with Facebook’s performance. Its stock is trading at $130.84 with a market capitalization of $385 billion. It hit a 52-week high of $133.80 following the results announcement. The stock has recovered from the 52-week low of $96.82 in February last year.

Facebook’s growth story is quite impressive. From a comparatively modest $5.1 billion in 2012, its revenues have grown at a cumulative annual growth rate of 53% over the past five years to $27.6 billion in 2016. Excluding 2015 when it reported 43% growth in revenue, Facebook has consistently delivered growth of more than 50% each year since 2012. It is now indicating slowdown, which is understandable because delivering these phenomenal rates for a company of this scale is highly unusual and unprecedented.

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Photo credit: Esther Vargas/Flickr