In terms of stock gains, it’s been a good year for Facebook (NASDAQ:FB). FB stock has moved higher by 43%, and the rally has been backed by strong fundamental factors. I believe that the rally of FB stock can continue. In this column, I will discuss the key factor that is likely to ensure that the stock’s positive momentum lasts a lot longer.
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I want to emphasize that I am expecting Facebook stock to rise over the long-term. Therefore, this column is primarily geared towards long-term investors. Those investors should buy FB stock on any weakness.
FB’s Average Revenue Per User Will Trend Higher
Facebook’s daily active user count has increased from 1.3 billion in the second quarter of 2017 to 1.6 billion in Q2 of 2019. FB has also benefited from a steady uptrend of monthly active users. With internet penetration still increasing in emerging markets, I expect the uptrend to continue.
However, the catalyst for the company’s upcoming revenue increases and for the long-term gains of FB stock will be its average revenue per user (ARPU). There are some interesting aspects of the company’s monthly active users (MAU) and of its ARPU.
The United States and Canada contribute just 10.1% of its MAU. However, these two countries, which have an ARPU of $33.27, account for 48.8% of its total revenue. In Europe, its ARPU is $10.70. Its ARPU in Asia Pacific and the rest of the world is $3.04 and $2.13, respectively.
Clearly, FB can tremendously increase its ARPU in Asia Pacific and the rest of the world. Due to increasing internet and smartphone adoption in emerging markets, more advertising spending in those areas will shift online. That will take the company’s ARPU higher in the coming years.
The Potential Impact on FB’s Revenue
For Q2, FB reported total revenue of $16.9 billion, $12.2 billion of which came from the United States, Canada and Europe. Therefore, revenue from Asia Pacific and ROW was just $4.7 billion.
However, the MAU from Asia Pacific and the rest of the world was 1.78 billion.
If that MAU figure remains the same and the ARPU from those regions increases to $10, the total quarterly revenue from Asia Pacific and ROW will be $17.9 billion.
Even if FB’s total revenue from U.S., Canada and Europe remains unchanged, in that scenario Facebook’s total quarterly revenue would jump to $30.0 billion, versus its current level of $16.9 billion. That is a conservative estimate, as I am assuming that the company’s revenue from the U.S., Canada and Europe remains flat.
Of course, this hypothetical scenario won’t unfold overnight or even in the next few years. But in a number of regions, Facebook’s ARPU is quite low, and that will gradually change.
As its ARPU and MAU rise, Facebook is well-positioned to generate sustained revenue, earnings and cash-flow growth. Of course, those trends will provide positive catalysts for FB stock
FB Might Pay Dividends Soon
As of Q2, Facebook had cash, cash equivalents, and marketable securities of $48.6 billion. In addition, FB generated $4.8 billion of free cash flow in Q2. This implies annual free cash flow of almost $20 billion.
Given its high cash reserves, FB can start paying dividends within the next 12-18 months. When FB announces that it’s going to start paying dividends, FB stock will rally.
Facebook has actively been repurchasing FB stock, and that has created some shareholder value. However, dividends will certainly boost Facebook stock further and attract more investors, since the company’s healthy cash flows should enable it to steadily raise its dividends.
Final Thoughts on FB Stock
Considering the steady growth of the company’s monthly active users and its ability to boost its top line, FB looks poised to be a cash-flow machine over the long-term.
Overall, FB stock is attractive. Investors should consider buying it at its current levels and on any correction driven by stock market pullbacks.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
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