Social media behemoth Facebook Inc (ticker: FB) posted fourth-quarter earnings results Wednesday afternoon, and boy, was Wall Street happy with the results.
In after-hours action, FB stock rose more than 3 percent.
Shares had already been hot going into the earnings announcement, having risen more than 15 percent since Jan. 1 and an incredible 248 percent since its 2012 initial public offering. Shares came within a penny of their all-time high of $133.50 during normal trading on Wednesday, before finishing the day up 2.2 percent at $133.23.
Facebook stock got as $137 in after-hours trading, an all-time high.
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So what exactly happened in the fourth quarter, anyway?
Adjusted revenue jumped 51 percent to $8.81 billion, beating the 46 percent rise to $8.51 billion analysts expected the company to haul in. Earnings per share jumped 78 percent to $1.41, easily exceeding the 66 percent increase to $1.31 per share that Wall Street wanted.
Due to the stellar fourth quarter, full-year fiscal 2016 numbers also impressed, with revenue of $27.64 billion cruising past the expectations for $27.35 billion, and EPS of $4.23 surpassing the consensus $4.14 estimate.
Facebook’s report was another big win for large-cap tech after Apple ( AAPL) posted its own blowout earnings announcement late Tuesday, sending shares up 6 percent to 52-week highs. Another huge name, Amazon.com ( AMZN), will report earnings after markets close on Thursday.
Despite its massive network, Facebook continues to grow at a healthy pace, and monthly active users rose 17 percent to 1.86 billion by the end of 2016.
The revenue growth came entirely from advertising, which accounts for substantially all of Facebook’s revenue. Ad revenue soared 53 percent to $8.63 billion in the fourth quarter, while revenue from payments actually declined by 12 percent to $180 million, or just 2 percent of total revenue.
Facebook’s mobile advertising revenue accounted for 84 percent of total ad revenue, an increase from 80 percent the year before.
While FB’s top-line growth rate of 51 percent is impressive in absolute terms, it’s still a slowdown from the past. Just a quarter before, revenue grew at a 56 percent year-over-year clip, while EPS jumped 165 percent. However, some deceleration was widely anticipated.
Average revenue per user, or ARPU, an important metric showing how well Facebook can monetize its sprawling user base, rose to $4.83 in the fourth quarter, an increase of 29 percent from the $3.73 ARPU number posted in the fourth quarter of 2015. That number has come a long way since FB stock first went public — its first quarterly report for the third quarter of 2012 reported ARPU of just $1.29.
At that time, Facebook had a mere 1.01 billion monthly active users, or MAUs.
Facebook Video was a major point of emphasis in 2016, growing rapidly and attracting more advertisers with it. Video gives Facebook another way to monetize its users and boost ARPU over time.
“People are watching 100 million hours per day of video on Facebook. So they’ve really built that as a channel to get people watching that and now they’re turning it more and more into an advertising platform,” says David Rogers, branding expert and faculty member at Columbia Business School.
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Several specific moves in the video landscape allow FB to increase its ARPU.
“They’re going to start allowing mid-roll ads in the middle of longer videos,” Rogers says. “And Instagram Stories, their Snapchat competitor — they also now have a new ad product in that.”
Since total revenue is simply worldwide ARPU multiplied by worldwide MAUs, growth in the product of these two metrics is necessary for revenue growth over time — barring Facebook’s entry into other non-social networking businesses.
Thankfully for shareholders, Facebook actually is entering other businesses that could, over time, meaningfully diversify its revenue stream. Specifically, CEO Mark Zuckerberg has high hopes for Oculus, the virtual reality company Facebook acquired in 2014 for $2 billion.
On that note, here’s a look to what the future holds for the company, as well as FB stock owners.
Looking forward. Other than Alphabet ( GOOG, GOOGL), Facebook remains pretty much the only player in town for online advertising. Its unique ability to slice up, segment, and provide targeted advertising to marketers is what drove the FB stock price to all-time highs before Wednesday’s earnings report.
Still, the future may not be entirely ad-based.
“One has to wonder when Facebook (and their peers) start taking ad prices up as opposed to focusing on pure volume. While there are almost limitless impressions, Facebook runs the risk of oversaturation and disrupting the user experience,” says Greg Portell, lead partner at A.T. Kearney.
Such oversaturation would be devastating today, but down the line, Facebook hopes to diversify its revenue stream.
Zuckerberg, upon acquiring virtual reality firm Oculus, outlined a vision for a world where virtual reality could help people attend entertainment events, college lectures, and even the doctor without having to actually go anywhere. That day is a long ways off to be sure, but if and when it happens, Facebook is positioning itself to be a leader in that industry.
Others see different drivers of Facebook’s sustained growth.
“The long-term growth stories are monetizing things like Instagram for video, Facebook Messenger and Whatsapp,” says K C Ma, professor of finance at Stetson University.
In November, Facebook announced it would spend $6 billion buying back shares of FB stock in the first quarter of 2017, so that should provide some support for shares through the end of March.
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Facebook was valued at 25 times forward earnings going into Wednesday’s report. Given its growth and the unparalleled size of its network, that seems more than reasonable.
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Facebook Inc (FB) Stock: Q4 Earnings Crush Expectations originally appeared on usnews.com
