Facebook, Inc. (FB) is one of the most followed companies on Wall Street, yet analysts have had a difficult time projecting its earnings in the last couple of years as the company continued to find new ways to monetize its user base better than expected.
In the next few years, many investors and analysts expect Facebook to efficiently monetize WhatsApp and Instagram, paving the way for stellar financial performance. The under-monetized status of Facebook’s international users has failed to grab the attention of many investors and the financial media, but this could be one of the biggest drivers of company earnings in the next few years.
The Opportunity
Daily active users (DAUs) is one of the most popular metrics used by Facebook in its financial reports to give color on how the company is performing. Advertising accounted for more than 97% of company revenue in 2020 and has been the primary contributor to corporate earnings over the last decade.
With this understanding of the business model, it would be reasonable to assume that Facebook is generating the bulk of its revenue from regions with the highest number of daily active users.
This, however, would be a false assumption. For instance, U.S. and Canada accounted for 49% of the company’s revenue in the fourth quarter of 2020, but just 10.5% of total daily active users. On the other hand, the Asia-Pacific region’s contribution was 24.5% in Q4, but this region accounted for more than 40% of DAUs.
Furthermore, Facebook reported average revenue per user of $53.56 in North America, whereas it was just $4.05 for the Asia-Pacific region. These statistics confirm that Facebook has yet to monetize its user base in Asia meaningfully, but macroeconomic tailwinds could help the company perform much better in the future.
Firstly, the internet penetration rate in many Asian countries is significantly low in comparison to developed countries such as the United States and Canada. However, there is reason to believe that things will change for the better in the next few years.
According to data from Internet World Stats, the internet penetration rate in Asia is just 59.5% in contrast to the 90% penetration rate in North America. Asia is the most populous continent in the world and is home to approximately 55% of the global population. Many nations including India, Pakistan, Malaysia, and Indonesia have pledged to invest billions of dollars in improving IT infrastructure in the coming years, and these investments will result in a much higher internet penetration rate in the future.
This will present Facebook with a good opportunity to grow its user base at very healthy rates in this region. To this end, rapid growth in the number of internet users will prompt advertisers to embrace online advertising channels including Facebook, which is likely to help the company report higher average revenue per user from Asia in the foreseeable future.
Secondly, the World Bank expects Asia and Latin America to report much higher economic growth rates in the next decade as a result of favorable structural and demographic developments. There is a strong correlation between real GDP growth and the growth of the advertising industry, and this relationship paints a very promising picture of what the future holds for Facebook in international markets.
The Buyback Program Will Reward Investors
Facebook does not have any long-term debt on its balance sheet and the company recently announced a share repurchase program of $25 billion on top of the existing $35 billion buyback program. These repurchases will not only prove to be an additional source of income to shareholders, but also a boost to earnings per share in the future as the number of outstanding shares will decline once the buyback program is complete.
Wall Street’s Take on Facebook
Based on price targets assigned for the company by 35 Wall Street analysts, the average analyst price target is $340.64, which implies an upside potential of 26% from the current market price of $269.45. Additionally, as FB has received 31 Buys, 3 Holds and 1 Sell in the last three months, it earns a Strong Buy consensus rating. (See Facebook stock analysis on TipRanks)
Takeaway
Facebook was one of the best-performing companies during the bull run that started in March last year. Even though the stock has appreciated more than 150% over the last five years, the company is still in the very early stages of its growth story. Investing in Facebook stock today could lead to multi-bagger returns in the next decade.
Disclosure: The author is long Facebook shares.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.