With one of the largest IPOs of all time, Facebook reached incredible earnings heights in just a few years’ time. Along the way, however, it also made decisions that have resulted in a major loss of people’s trust. But that’s another story for another time. This post is about Facebook the high-growth company.
Originally published by 10x Research in January 2019.
Facebook, Inc., builds and manages products that enable people to connect and share through mobile devices, personal computers and other media. The company’s products include Facebook, Instagram, Messenger, WhatsApp, and Oculus. Its revenue model involves selling advertising placements to marketers. Facebook competes primarily with Google and Microsoft (LinkedIn), but also other social media operators such as Snap (Snapchat) and Twitter.
Growth
The FB stock started with $18.06 a share in August 2012; $1,000 invested in it at the time would grow to $10,760 by June 2018 when shares went up in price to $194.32 a piece.
During the period of analysis, the company’s revenue increased by 699%, from $5b in 2012 to almost $41b in 2017. This yielded an average growth rate of 116% per annum. Net income has been on an even greater upward trajectory, skyrocketing from $53m to $16b. This extraordinary growth has been internally financed, thanks to rich reserves of cash and retained earnings and with virtually no external debt.
There was a significant hike in capital injection of 398% between 2012 and 2017. Free cash flow expanded most prominently, from $377m to $17b. Capital conversion into revenue — or revenue generated for every dollar invested in business — was up 61%, standing at $0.35 by December 2017.
The company’s spending on operating expenses increased from $1.8b in 2012 to $7.2b in 2017. R&D expenses grew by an even larger 454%, picking up the pace during the last few years. At the same time, the effectiveness of sales (which stands for revenue generated for every dollar spent on operating expenses) improved a moderate 49%. Employee productivity went up by about as much, 47%. Reversely, the cost of sales dropped during the period of analysis. Together, these advances produced a great increase in net margin numbers, from 1.04% to 39.20%.
Business
Comparing company efficiency metrics to industry averages helps discover factors that make a business stand above the rest.
Facebook has been expanding at a much faster pace than both the industry and the sector it is part of. In the US, the growth rate of average revenue of the Internet Services & Social Media industry for five years ending 3Q’18 stood at 25.94%, according to CSIMarket. The Technology sector’s statistic was a much lower 6.68%. In contrast, Facebook grew its revenue at twice the rate, 51.53% per annum during the same period. The company’s earnings grew by an even more impressive 212.99%, whilst the five-year industry average stopped at 24.49% (and the sector’s at 7.79%).
Efficiency wise too, the company’s five-year gross margin averaged 83.16%, much higher than the industry’s 54.96%. Furthermore, Facebook’s average net margin of 27.8% compared favourably with the industry’s 16.43% (and the larger sector’s 12.81%).
An examination of employee productivity showed that as of 3Q’18 Facebook generated sales per employee of around $5,641,483, while the industry recorded just half of it, $2,052,584.
Industry
Sizeable industry is a key contributor to the growth of a firm, for there needs to be sufficient demand to accommodate the competition.
Users. Penetration of social networking sites has been rising progressively during the past decade. The total number of social media users worldwide reached 2.46b in 2017 (which is approximately 71% of all Internet users), up from 2.14b in 2015. The equivalent numbers stood at 208.91m and 203.87m in the US, corresponding to about three-quarters of the country’s population. North America is Facebook’s topmost market where it earns the highest average revenue per user: the company generated $11.96 in advertising revenue per user in 2015, up from just $5.32 in 2012.
Competition. With over 2.13b active monthly users at present, Facebook is the social networking leader in terms of reach and scope. Nonetheless, other social networks have thrived too. Twitter and Snapchat are currently the largest competitors to Facebook among English-centred social media sites. On average, a user spends about 1,100 minutes per month on Facebook; Snapchat has the second highest engagement time at around 350 minutes per month; Twitter’s is 150 minutes per month. In terms of user engagement, Facebook’s biggest rival is YouTube, where 83% of users claim to use it more often than Facebook, based on a 2018 survey.
Insights
So what had contributed to Facebook’s growth story? Social networking has become one of the most popular ways for Internet users to spend their time online. Facebook has been at the forefront of this global trend.
Rise of mobile Internet. Social networks have benefitted immensely from the growing usage of smartphones and mobile devices. In the US, for example, social media usage currently accounts for 21.4% of total mobile minutes. Most social networks are now available as mobile apps, their features optimised for mobile Internet browsing. Increasingly, therefore, advertising revenue has been coming in from mobile channels. Facebook’s share of mobile advertising revenue almost doubled to 88% in 2017 from 45% in 2013. Mobile messengers have also proliferated. WhatsApp, for example, is now the most popular mobile messenger app worldwide, with over 1.3b monthly active users as of January 2018.
Strategic expansion. Facebook has always been on the lookout for profitable diversification opportunities, making more than a dozen different acquisitions since 2010. It purchased photo-sharing app Instagram for $1b in 2012; among its other notable buys are VR gaming headset Oculus Rift and WhatsApp, the latter purchased for $19b in 2014. Beyond these, the company has investments in technology initiatives such as artificial intelligence, augmented and virtual reality, and connectivity. Facebook’s geographic reach has been expanding as well. It generates about 55% of revenue from outside of the US. The social network enjoys the largest chunk of the user engagement time among major social media sites, averaging 80% across North America, Asia and Europe (with the exclusion of China, Russia and South Korea).
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