How Ad Revenue Powers Facebook's Entire Business - The Motley Fool

With more than 2.6 billion daily users, there's no denying that Facebook (NASDAQ:FB) reaches a lot of people around the world across its free-to-use properties: Facebook, Messenger, Instagram, and WhatsApp. Most of the tech stock's revenue is from advertising, so how does Facebook stack up on user monetization compared to its competitors?

Corinne Cardina, Fool.com's healthcare and cannabis bureau chief, spoke with Nick Sciple, the bureau chief of tech, energy, and industrials, on a Fool Live episode recorded Feb. 11, about the eye-popping profit Facebook makes off each of its users.

 

Corinne Cardina: It's the attention economy. They are selling our eyeballs and that's really its value proposition. All of its big, social platforms are free to use, whether you're talking about Facebook, Instagram, WhatsApp. Where its money come from is ads. Its revenue, in terms of ads, in 2020, that ad revenue reached $84 billion. The other part of its revenue, almost $2 billion, comes from non-advertising revenue. That's early on and stuff like e-commerce. We're going to talk briefly about Oculus, exactly. I think the big story here with 2020 in its earnings just coming out is we were typically in a recession in 2020 and ad businesses typically don't do that well in recession. Advertising is usually one of the first things that businesses cut when times get tough. But Facebook was not hurt badly. Its revenue was up 22% in 2020. Any context about why Facebook was able to do so well, being an ad-dependent business in a recession?

Nick Sciple: Well, Corinne, they had the worst quarter ever. They were only up 10% in the second quarter, so that was their worst year, slowest rate of revenue growth the entire history of the company. That number alone just speaks to what a monster this company has been to quarter after quarter, your worst quarter ever since IPO was only 10% revenue growth as an advertising business in the middle of a global pandemic. Again, speaks to their power. I think back this summer, The Economist wrote an article called Online Advertising: The New Rent. I think that's a good explainer of the world that we're in today. You mentioned we're an attention economy, I mentioned how people are spending their time on these platforms, people shopping online, all those things. Facebook is able to put advertisers in front of audiences in a way that you need to own that real estate in a really important way. I think it just speaks to Facebook's importance in the market. Obviously, this is a big pull-forward. We've seen in e-commerce, everybody has been talking about that, whether it's Etsy (NASDAQ:ETSY) or Pinterest or any of these platforms that are into e-commerce have had incredible success. Part of that is because the physical real estate in the real world has been made less relevant because people can't leave their house, and are in this online real estate, whether it's on Facebook or it's at the top of the search for Google or what have you, those areas have become more valuable. I know early on in the pandemic, a lot of people pulled back advertising spend. But throughout the year, we've seen folks get more comfortable ramp-up, lean more on to online advertising and Facebook is one of those platforms you have to go to. Just to give you some numbers, by far, Facebook is the best in the business in monetizing their users. Just go to your fourth-quarter average revenue per user, this is that the end-all be-all number that can help summarize how platforms are monetizing their users. In the U.S. and Canada, Facebook average revenue per user $53.56 cents. Incredible. We compare that to Pinterest, $5.94 in the fourth quarter, [Snap (NYSE:SNAP)] Snapchat, $7.19 in the fourth quarter, if you go worldwide even, Facebook $10.14 in the fourth quarter, Pinterest, a $1.57, Snapchat, 344. Facebook is this platform where the eyeballs go when they can't leave their house, they own the real estate, that's important. Then second, they are the best in the business in monetizing those users and getting results for advertisers. I mean, these are competitively bid ads. These prices reflect Facebook's effect events at least to a certain extent. You're the best in the business, you own real estate that cannot be replicated, you're going to do pretty OK. But you only get 10% revenue growth though in the middle [laughs] of the global pandemic only.

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