In 2004, Mark Elliot Zuckerberg along with some of his peers launched Facebook, which they would not have thought that will revolutionize the landscape of social media. Facebook, arguably the most successful social networking website, has a wide user base of around 2 billion and is currently valued at USD 256.42 billion. But is this high valuation of Facebook justified? Let us take a closer look.
Facebook has grown its revenue at a compounded annual growth rate (CAGR) of 50.1% over the past 3 years with ROI (Return on invested capital) at 18.9%. Main driver of its revenue stream are advertisement on social media space. Facebook targets specific segment and demographics on the basis of information posted by people. High growth in marketing budget of advertisers with specific targeting capabilities led to growth in average revenue per user (ARPU). Feed based ads with less cluttered platform facilitate high user engagement which is expected to grow further in future years. With the introduction of its mobile app, Facebook is able to increase the stickiness of the users in mobile space. Facebook also sells virtual goods and games in the mobile space by charging a transaction fee on each virtual good purchased. However shifting of consumers from desktop usage to mobile usage is affecting the revenue stream negatively or positively?.
Social platforms viz. Instagram and WhatsApp, which were acquired by Facebook, are also driving its revenue growth. Instagram contributes more than 300 million active users and WhatsApp 800 million plus monthly active users to Facebook user base. These mobile platforms can be monetized through subscription fees, online payments, advertising, etc. Valuation of these two platforms together contributes $50 billion to the valuation of Facebook and is expected to contribute greater meaningful revenues in future.
Facebook, which has established its network in most of the developed countries, has still a long a way to go when it comes to penetration in the developing markets. This is due to lower user base and lower average revenue per user which provides immense opportunities for growth in terms of revenue and user base. With a huge potential to grow in emerging markets, targeted ad marketing and leveraging mobile space, Facebook is validating its valuation.
This blog is written by Neha Jain, Student MBA FA 2015-2017 Batch
Data source: Trefis Coverage Report