SWOT Analysis of Facebook Inc.

Facebook (NASDAQ:FB) stock has climbed 30% over the past year, handily
outperforming the NASDAQ's 22% gain. But after that big rally, does the stock still
have room to run? To answer that question, let's do a simple SWOT (strengths,
weakness, opportunities, and threats) analysis of Facebook's business

Strengths

Facebook, the world's largest social network, has 1.44 billion monthly active users
(MAUs) worldwide. Unlike rivals Twitter (NYSE:TWTR) or LinkedIn (NYSE:LNKD),
Facebook is consistently profitable on a GAAP basis. Last quarter, mobile
advertising revenue accounted for 73% of Facebook's advertising revenues, up
from 59% in the prior year quarter. Total ad revenues rose 46% annually as its
average revenue per user (ARPU) climbed 25% to $2.50. Unlike Google, Facebook
limits the number of ads it displays every quarter. This strategy -- which
emphasizes quality over quantity -- caused Facebook's average price per ad to
soar 285% annually last quarter as ad views fell 62%.

Research firm eMarketer estimates that Facebook generated $3.54 billion in

mobile display ad revenues in the U.S. last year, more than triple Google's $1.13
billion. Unlike Google's scattered network of display ads, most Facebook ads are
displayed within its News Feed.

Last year, Facebook beefed up its video delivery platform for video ads, and
launched its own embedded video system to challenge Google's YouTube.
Facebook uses single-sign ons (SSOs) in third-party apps and sites to tether users
to its News Feed, which gathers data for marketers. Thanks to its strength in
social, users are often more inclined to use Facebook's SSOs instead of Google's.

Weaknesses

Despite those strengths, critics have questioned Facebook's "conversion rate,"

which measures whether or not purchases or marketer-specified actions occur
after an ad is clicked. Research firm Marin Software reported that 63% of clicks on
Facebook ads came from mobile devices during the fourth quarter of 2014, but
only 34% of conversions occurred on smartphones and tablets. Meanwhile, the
click through rate (CTR) of Facebook ads is consistently lower than the CTR for
Google AdWords. Those two weaknesses, combined with soaring ad prices, have
caused smaller businesses to question the price effectiveness of Facebook ads.

Another key question is whether or not Facebook can keep growing. Last quarter,
MAUs rose 13% annually, but that figure has ticked lower every quarter. If MAU
growth hits single digits, Facebook will need to rely more heavily on ARPU growth
instead. Facebook's heavy investments into expanding its ecosystem have also
eaten into its bottom line. Last quarter, costs and expenses soared 83% year-over-
year to $2.6 billion, causing its net income to slip 20% to $512 million.

Opportunities

However, investors should remember that Facebook's ecosystem already extends

far beyond its News Feed. Facebook also owns WhatsApp, which has 800 million
MAUs, and Instagram, which had 300 million MAUs at the end of 2014. WhatsApp
relies on nominal $1 annual fees, but unlike Facebook or Instagram, it isn't
banned in China. This gives it a possible backdoor into the massive Chinese
market.

Citigroup analysts estimate that Instagram, which Facebook bought for $1 billion
in 2012, could generate $2 billion in "high-margin" revenue annually after it is
fully monetized with ads. That would equal nearly 12% of Facebook's projected
2015 revenues.

Facebook is also evolving its stand-alone Messenger app, which can already be
used for peer-to-peer payments, into a mobile platform of its own. This could
eventually generate additional revenue from sponsored accounts, sticker sales,
and e-commerce integration with third-party sites.

Facebook also recently expanded into LinkedIn's backyard with "Facebook at

Work," which lets businesses create their own social networks. Facebook's Oculus
VR could also launch its long-awaited Rift VR headset later this year, and the
company is launching Internet.org in new markets to tether more developing
market users to its ecosystem.
Threats

Those are all lucrative long-term opportunities, but Facebook also faces four near-
term threats. First, a strong dollar could weigh down Facebook's top and bottom
line over the next few quarters. Second, Facebook faces ongoing questions about
privacy in the EU, which could lead to a damaging probe of its business strategies.

Third, data breaches could eventually turn hacked Facebook accounts into
"skeleton keys" for SSO connected apps and websites. Lastly, the rise of ad-
blocking extensions like Facebook AdBlock could reduce the profitability of
Facebook ads. According to research firm PageFair, a similar extension, AdBlock
Plus, cost Google $887 million in potential ad revenues in 2012.