Facebook's 3Q Mobile Revenue Highlights a Solid Quarter
Improving advertising and user engagement metrics in the third-quarter underscore the attractiveness of Facebook shares, says Morningstar's Rick Summer.
Market Update
Facebook (FB) posted third-quarter results Tuesday that were highlighted by several improving metrics, including stronger sequential growth in ad revenue, improving engagement, and a meaningful mobile advertising business that should easily generate more than $1 billion over the next four quarters. These data are largely in line with our valuation and thesis, and we continue to recommend the shares at these levels.
Advertising revenue grew 36% versus 2011, largely because of new advertising products launched by Facebook. Given the relatively arcane nature of measuring the effectiveness of social advertising, we believe this growth is extremely impressive. When the industry matures and measurement techniques become more robust, we expect revenue growth to accelerate. Even today, we are optimistic that Facebook will continue to find new ways to monetize its user base while protecting the user experience. As evidence, users are going to Facebook more frequently than ever, with more than 58% of monthly users going to Facebook every day. Furthermore, we are seeing improving engagement across all geographies.
While mobile Facebook users have helped improve engagement, mobile ads are also generating revenue growth for the company. Seemingly, Facebook is bucking the trend of its competitors like Google (GOOG), which have been dominant in the traditional desktop Internet industry. Contrary to legacy companies that retrofit advertising for the mobile channel, Facebook's new ad products represent incremental revenue for all advertising channels. Management iterated that one product, News Feed, is generating approximately $4 million in revenue per day, with 75% of the revenue coming from mobile ads. On an annualized run rate, this one product is generating approximately $1 billion at this point.
The primary down note in the quarter related to revenue from payments. Payment revenue declined 8% sequentially as a result of Zynga's diminishing performance of its games played on the Facebook network. Zynga has been a large partner, and Facebook earns a percentage of virtual goods sales that Zynga collects from its users. However, Zynga's misfortunes have constrained Facebook's growth opportunity, although other gaming partners have shown growth. Still, payments represented 14% of revenue for the quarter, and we view advertising as the primary growth engine going forward.
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