Monday, July 28, 2014

2 Important Observations From Facebook, Inc.’s Second-Quarter Earnings

Given Facebook's  (NASDAQ: FB  ) post-earnings gain, and its new all-time stock high, it's clear that the company struck gold in the second quarter. While investors can focus on an array of different data points, two key observations should be at the height of investors' focus, which conveniently involve BlackBerry (NASDAQ: BBRY  ) and Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) .

The value of advertising
Facebook had a flawless quarter, with revenue of $2.9 billion on growth of nearly 61% year over year. Meanwhile, its net earnings soared 100%, further driving the company's already-impressive profit margin of 21.5%.

Nonetheless, certain metrics are naturally more important to shareholders than others, which include daily active users, which were up 19% overall and 39% on mobile. This metric is important, as it shows that engagement remains strong, which is important for advertisers.

With that said, after a slight decline in average revenue per user, or ARPU, during the first quarter, Facebook saw its worldwide and U.S. and Canadian ARPUs rise 12% and 10%, respectively, quarter over quarter, with the latter reaching $6.44 and the former at $2.24.

Therefore, with more than 1.3 billion users, and the integration of new advertising products like video, Facebook's upside in this arena has never been higher. Plus, there's a good chance that the company's ARPU in the U.S. and Canada isn't even close to reaching its peak.

Specifically, the firm KPCB estimates that Google's U.S. ARPU reached $45 last quarter, which was up $3 year over year. As most know, Google creates the majority of its revenue from advertising, and with nearly $16 billion in the second quarter, the company still saw paid clicks rise 25% year over year.

Therefore, with Facebook having a larger platform, exceptional engagement, and great success with new advertising products, investors should feel almost assured that Facebook has more to gain than Google. In fact, given these reasons, Facebook might even reach an ARPU of $45 one day.

The messaging payment speculation is a reality
Hiring PayPal chief David Marcus to run messages never made sense for Facebook. Yet, his hire last month fueled speculation that Facebook is, in fact, in the later stages of rolling out a payment processing service, of sorts, like PayPal.

This has been a belief for quite some time, and with 1.3 billion users, 30 million small business pages, and over one million advertisers, the initial belief was that such a service could be a major revenue-producer if utilized correctly.

Nonetheless, with mobile growing fast, and now accounting for 25% of Internet traffic, investors have begun to speculate that Marcus will lead the company's plan to incorporate payment processing with messaging. This idea first rose following BlackBerry's last quarterly conference call.

In that call, BlackBerry CEO, John Chen, discussed monetizing the 100 million BBM, or Messenger, users it expects to have at year's end. Chen called mobile payments "the next big thing" and disclosed that BlackBerry already has contracts signed for a per-transaction business model with its popular Messenger application.

With that said, Marcus heading Facebook's messaging business now makes sense, and the only difference between Facebook and BlackBerry's messaging applications is that the former has well over 200 million users already, not including WhatsApp. Albeit, Zuckerberg surprisingly discussed this topic, acknowledging that payments will be integrated with Messenger, making it an important observation in the company's long-term plan.

Foolish thoughts
When you consider what's creating a buzz for Facebook investors right now, including payments, mobile, advertising, and the buy button, it appears that these four things will ultimately come together and play an enormous role in the next era of Facebook, both on PCs and mobile.

Therefore, if advertisements, both on PCs and mobile, include items for sell with the option to buy that can ultimately be processed using Facebook's own system, investors can see how the payment processing initiative can be very lucrative and how the company's ARPU could most certainly soar as advertisers see more value in the platform. Hence, Facebook may look pricey at $75, but in looking ahead, the company is making the right moves to drive long-term growth.

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