Facebook's (META 0.90%) unprecedented growth story may be just getting started.
Facebook's average revenue per user (ARPU), defined as ad revenues divided by monthly active user count (MAU), is far lower abroad (where the company has far more MAUs) than in the U.S. and Canada. Because of this, Facebook has an enormous opportunity to drive revenue growth in the future. And its stock could prove to be a fantastic buy in the process.
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Selling ads to marketers is Facebook's business. And those bullish on Facebook shares believe the company will be able to maintain its position as top dog in the social-networking world: Its monthly active users surpassed 2 billion this year, and the information Facebook has on those users is precious to advertisers.
That MAU figure, incidentally, is astounding. Put another way: Approximately 26.4% of the human race uses a social network founded in a Harvard dorm room.
Image source: Getty Images.
Can anything stop Zuckerberg from world domination?
There are risks, of course. Facebook always faces the risk that another social-media outfit will come along to supplant it. Myspace, after all, already had 1 million users by the time Facebook arrived on the scene.
There's also a matter of trust: If users don't trust a social network, they won't interact with it. Facebook has recently come under fire for the inadvertent sale of politically motivated ads to Russian buyers during the 2016 U.S. election; an estimated 126 million users were exposed. If Facebook users stop trusting the ads Facebook presents them, they won't bite. Click-through rates -- the percentage of users who click on an ad -- would be the first casualty, and Facebook's ability to command top dollar for ads would suffer.
To stave off challengers to its social-media supremacy, Facebook continues to make its ecosystem more valuable to users, through initiatives such as Facebook Marketplace and a food-ordering service. As for maintaining trust with its users, Facebook has announced several transparency-based initiatives, and cooperated with the U.S. government to hand over all requested data about the Russian ad buys.
Fertile ground for future growth
Facebook is not done growing.
During the third quarter of 2017, global ARPU was $5.07, up 26% year over year. However, in Europe (where Facebook has 364 million MAUs), ARPU rose year over year to $6.85 -- 32% of the ARPU in the U.S. and Canada. Should Facebook achieve, say, $10 in ARPU per quarter in Europe, it would gross an extra $1.15 billion in ad revenue. Back-of-the-envelope calculations can be made in all of Facebook's user geographies:
| Region | Monthly Active Users | Q3 Total Ad Revenue | Q3 ARPU | YoY Growth |
|---|---|---|---|---|
| U.S. & Canada | 239 million | $4.9 billion | $21.20 | 35% |
| Europe | 364 million | $2.4 billion | $6.85 | 45% |
| Asia-Pacific | 794 million | $1.74 billion | $2.27 | 31% |
| Rest of world | 675 million | $1.05 billion | $1.59 | 20% |
Data source: Facebook's Q3 Form 10-Q. YOY = year-over-year.
What investors should be taking away from this is that Facebook has a long runway of growth ahead, since the vast majority of its users generate a small fraction of the ad revenue that U.S. & Canadian users do.
Of course, its ARPU will eventually slow. Facebook said as much in its third-quarter filing with the U.S. Securities and Exchange Commission: "We expect that user growth in the future will be primarily concentrated in those regions where ARPU is relatively lower, such that worldwide ARPU may continue to increase at a slower rate relative to ARPU in any geographic region, or potentially decrease even if ARPU increases in each geographic region."
An eventual deceleration of growth shouldn't worry investors. What Facebook is describing is inevitable for any successful company. What matters is that when that day arrives, Facebook's advertising revenues will be much more significant than they are today.
Trading at just 26 times forward earnings estimates heading into the new year, Facebook is a growth stock investors should consider.
