Facebook: Asia On The Verge Of Breaking Out


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Emerging potential

AsiaPac made up 39% of Facebook’s monthly active users in 2017 and is one of its fastest-growing regions. Yet it only contributes to 16% of total revenue. This is because the average revenue per user (ARPU) for this region is just $9 compared to $85 for US/Canada and $27.5 for Europe. However, the ARPU in AsiaPac is growing rapidly. It was just $3 in 2013 and has since tripled to $9 – but the best is yet to come.

Source: Facebook 4Q17 Earnings Release

Breaking out!

A number of factors are coming together to drive the rapid growth of ARPU in AsiaPac. These trends are happening all across the region but can be seen clearly in India – which is one of Facebook’s largest markets.

According to Facebook’s India and South Asia head Umang Bedi, India is one of the fastest growing regions in the world in terms of Facebook revenue and is a strategic focus within the region. India has nearly 166 million monthly active users. This is about 9-10% of Facebook’s total user base and is its second largest market.

Number of Facebook users in India from 2015 to 2022 (in millions)

Source: Statista

Rising smartphone penetration

The percentage of mobile phone users who use a smartphone in India is expected to jump from 29.8% in 2016 to 39% by 2019. Smartphone shipments in India have risen from just 10 million in 2011 to 124 million by 2017 and now accounts for >10% of the global smartphone market. This is important to Facebook as the proliferation of smartphones will allow greater number, and better quality, ads to be displayed. Compared to feature phones, smartphones will greatly enhance Facebook’s ability to monetize its advertising potential. According to eMarketer.com, mobile internet ad spending in India is expected to jump from $589 million in 2017 to $943 million by 2018. Similarly, in Indonesia, which has 88 million Facebook users, ad spending is expected to jump from $743 million in 2017 to $1.5 billion by 2018.

Share of mobile phone users that use a smartphone in India

Source: Statista

Data explosion

The recent entry of a new mobile player in India – Jio – has dramatically changed the industry landscape. Backed by one of India’s most powerful conglomerates, Reliance Industries, Jio has garnered 130 million subscribers in just over a year. It did so by offering very competitive rates on data while throwing in voice for free. As a result, more than 400 million subscribers can now afford to spend the minimum Rs 500 on digital services. India is on its way to becoming one of the top countries for mobile data usage. This is great news for Facebook as data constraints were one of the major factors that was holding back its mobile advertising growth in India in the past.

Source: JIO Analyst Presentation – March 2017

All coming together

The impact can already be seen in Facebook’s quarterly figures. The ARPU in AsiaPac was just $1.98 in 1Q17, but by 4Q17, it has jumped to $2.54. If we simply annualise it, the implied ARPU for AsiaPac will already hit $10-11 in 2018. Growth may be even faster as the rapid growth of smartphones with its wider screens, and more affordable data, could drive greater advertising opportunities.

ARPU in AsiaPac has grown rapidly, but yet remains pretty low

Source: Facebook 4Q17 Result Presentation

Conclusion

AsiaPac makes up 39% of Facebook’s monthly active users in 2017 but contributes to just 16% of its revenue. This is because the ARPU in AsiaPac is only $9 compared to $85 for US/Canada and $27.5 for Europe. According to eMarketer.com, mobile internet ad spending is expected to grow by +60% in India and 100% in Indonesia. Both these countries are among Facebook’s largest markets in Asia.

The proliferation of smartphones and affordable data has opened up the advertising potential for Facebook here. Our estimates show that every $1 jump in the ARPU of AsiaPac can increase Facebook’s net profit by 2%. If ARPU in AsiaPac jumps from $9 to $15, it could potentially add 12% growth to Facebook’s earnings.

The recent scandal may impact Facebook’s earnings in US/UK. However, investors should not overlook the fact that Facebook has built up a sizeable user base in Asia. With smartphone penetration hitting >40% in these regions, it could bring about a dramatic change and Asia could begin to contribute meaningfully. After the recent selldown, P/E has fallen to below 20x, which is attractive given the 35-40% growth.

Source: eMarketer.Com

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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