Monday 21 November 2016

The Social Commerce Unicorn That Could Ignite Facebook's Global ARPU Growth


  • Facebook has had outstanding financial results in 2016, however the stock has pulled back since Q3 results.

  • Despite recent performance, investors may be wary of future growth prospects given the size of the company and ARPU challenges lying ahead.
  • Facebook has been an aggressive acquirer and I believe it will be again in order to capitalize on the trend of monetized livestreaming.
  • Peeks is a newly-released ecommerce enabled livestreaming platform that claims to be the only one of its kind with 100% in-house payment processing.
  • After just three weeks of going live, Peeks has demonstrated the strength of its livestreaming and payment processing capabilities and has signed several agreements with large firms.

Facebook, Inc. (FB) has had a strong 2016 by all accounts. Revenue is up 56% from the first nine months of 2015 and EPS has nearly tripled from $0.75 to $2.05 during that same time frame. Despite that, the stock has pulled back about 10% from the start of the month when Q3 financials were released. The bearish case on FB is that despite still being the leader in social media after all these years, despite the strong growth and despite an ARPU that is the envy of its rivals, its valuation metrics are stretched and user penetration is reaching the point of saturation.

Facebook has a trailing Price to Earnings ratio of 45 and forward P/E of 22 which are justified by a PEG Ratio of 0.83 based on analyst expectations of a 35% average annual EPS growth rate over the next five years. For a company with an over $330 billion market cap, this is going to be a very challenging expectation to meet. Facebook must continue to acquire and innovate in order to maximize the monetization value of its massive user base and justify its valuation.

ARPU: Excellent growth, but more can and needs to be done

Any investor should recognize Facebook's marvelous achievement of growing ARPU from $2.40 per quarter in Q3 2014 to $4.01 per quarter in Q3 2016. That, along with user base growth, has powered a more than doubling of revenue in a two year time span. Impressive, since we are talking about numbers that grew from a little over $3 billion a quarter to $7 billion a quarter solely on the strength of ad revenue.

Source: Facebook's Q3 10-Q

While everyone can respect Facebook's outstanding growth, there are a couple of areas of concern of which investors should be aware. First, ARPU strength has been highly regionalized. The United States and Canada, which comprise roughly 5% of the world's population, make up about half of Facebook's revenue. ARPU in this region was $15.65 in Q3 2016, over four times higher than the rest of the world. Monthly active users in this region were 229 million for Q3 2016 and have consistently growth 2 to 3 million a quarter since 2014. The combined population of the U.S. and Canada is 360 million, meaning MAU penetration is already 63.6%. Pretty much everyone in these two countries who are going to use Facebook are already using it (outside of teenagers who will soon gain their independence), and I wouldn't put money on the extreme laggards being positive drivers of ARPU.

Other than population growth in North America, Facebook's growth is going to have to be driven by users outside of its hot zone. Looking at the ARPU outside of North America and Europe, it resembles a lot more like Snapchat's ARPU metrics than something that would resemble Facebook:

As North America will make up a shrinking part of Facebook's revenue pie going forward, that will put pressure on global ARPU metrics. However, it also opens up a world of potential for the company to pull levers to increase its ARPU in these low-ARPU regions.

The second obvious issue when analyzing Facebook's revenue growth is its lack of success in monetizing anything outside of ad revenue. Its payments and other fees category is defined as:

"We enable Payments from people to purchase virtual and digital goods from our developers. People can transact and make payments on the Facebook website by using debit and credit cards, PayPal, mobile phone payments, gift cards, or other methods. We receive a fee from developers when people make purchases in these applications using our Payments infrastructure. We recognize revenue net of amounts remitted to our developers. We have mandated the use of our Payments infrastructure for game applications on Facebook, and fees related to Payments are generated almost exclusively from games. Our other fees revenue, which has not been significant in recent periods, consists primarily of revenue from the delivery of virtual reality platform devices and related platform sales, and our ad serving and measurement products."

Worldwide payments revenue has dropped from 7.7% of overall revenue in Q3 2014 to 2.8% of overall revenue in Q3 2016. Payments ARPU has dropped from an already paltry 18 cents in Q3 2014 to just 11 cents in the past quarter. The extremely heavy reliance on advertising revenue and the to-date failure to monetize outside of that could be troublesome as users may eventually tire of the inundation of ads on their news feeds and other areas of the site. A purchase like Oculus VR (a deal that I supported) may have seemed out of the blue at the time, but the company is right to try to diversify its revenue stream while also capitalizing on being the hardware and content platform of a speculative future trend like virtual reality.

While payments revenue has been pathetic, the flip side to this is that not one of Facebook's 1.8 billion monthly active users are earning a penny for spending time on the site. Facebook has an absolute monster opportunity to monetize and pay its base for the massive amount of content and traffic that they generate. This is an opportunity that the company recognizes as it has started to explore new ways for users to profit from their posts on its network. There is one such opportunity that I think could lead to explosive revenue growth if it is pursued.

Peeks: The platform that could ignite a new source of revenue for Facebook and its 1.8 billion users

Facebook is certainly not shy to the acquisition method of growth, having purchased Instagram, Oculus and WhatsApp in multi-billion dollar deals over the past four years, along with LiveRail, a publisher monetization platform for about half a billion, and several dozen other companies. With the emergence of Facebook Live and Smartphone-based livestreaming in general, I believe that the company will be aggressive in this burgeoning industry, particularly with apps that have demonstrated successful monetization. Mark Zuckerberg has tipped his hand with this important insight as to where he thinks augmented reality, a sensation that would rely on livestreaming, is headed:

"The biggest thing that I think we can take away from this as we invest in augmented reality in addition to virtual reality is that the phone is probably going to be the mainstream consumer platform [where] a lot of these AR features first become mainstream, rather than a glasses form factor that people will wear on their face."

YouNow was the first social network that enabled users to broadcast live and has since introduced its partner program for eligible users. Viewers buy bars which can then be used to buy in-app gifts to "tip" content providers that they like. Those content generators are then able to redeem those gifts for real money. There are several platforms that run on this same basic premise, though YouNow appears to be the largest, claiming over 100 million monthly users. Busker is a platform that allows musicians to broadcast and viewers to tip them, with a recent feature addition that allows musicians to sell their merchandise to their fans as well. Both of these platforms, along with similar ones, charge a fee that usually ranges between 30% to 50% of the tips generated. Some of them may have advertising while others will not, but the main source of revenue for all of them is the fee generated from their cut of the tips. Not advertising revenue.

Peeks, an ecommerce enabled livestreaming platform that is essentially 30% owned by Keek Inc. (KEEKF) (KEK.V) may be the best target of them all. What makes Peeks so special and why might Facebook be interested in the platform? First, I recommend that interested investors go to and download the app for themselves. As it has just been released to the world three weeks ago, the content generated by users so far might not yet be too stimulating, but the point is to get familiar with the technology that powers the high-quality live streams and built-in payment technology. It debuted on October 31 with a Halloween party. The party mostly featured B through Z-list celebrities babbling to each other for the first three hours before musical guests finally made it interesting for the final two, but the CEO was ecstatic that on the first night of going live, the app managed to handle a five-hour long, high-quality livestream from multiple cameras with no glitches. The purpose of the party was to prove the virility of the technology. The CEO of Peeks (as well as Keek and his private holding company Riavera and its subsidiary Personas), Mark Itwaru, has built a career in the payments processing industry and has spent nearly $20 million into the patented and patent-pending technology behind Peeks.

What differentiates Peeks from YouNow (which uses Google or Apple to process its layered system of payments) and Busker (which uses Stripe), is that Peeks does not use a third party payment processor. The CEO has claimed that Peeks is the only app of its kind that handles all of its own transactions. That means 100% of the revenue is shared between Peeks and the individual users. Avoiding a third party payment processor would save hundreds of millions annually in charges for a company the size of Facebook that could generate billions in tips.

Peeks also has a more liberal revenue sharing policy when compared to similar livestreaming platforms. For instance, while YouNow users must apply for eligibility into the partnership program, anyone using Peeks can start earning tips and cashing out as long as they have provided legitimate banking information. I believe that this is a huge policy advantage that will attract users from around the world, but particularly from developing nations. Individuals posing as journalists may risk their lives to broadcast political unrest in their countries. When broadcasting on Facebook Live, Periscope or a monetized app in which the user is not an eligible partner, they don't get paid. They can always direct their users to a GoFundMe page using those other platforms, but this is not nearly as effective or efficient as Peeks' built-in tipping capability that is up to the viewers' discretion and saves the content provider the indignity of openly begging.

Keek's legacy app had a very strong presence in the Middle East. Now that it has merged with Peeks, Peeks has inherited that presence. redirects to which features Peeks Video. According to its Alexa rankings, is already in the top 5,000 of most visited sites in Saudi Arabia after just three weeks of existence. The second strongest ranking country is Egypt, ranking just outside of the top 30,000 sites. So coupling the efficient tipping method with Keek's popularity makes Peeks very appealing to people in developing nations, an area of the world where Facebook's revenue badly lags and will continue to badly lag if it relies solely on advertising revenue. Advertising in these regions earn a much lower rate than in North America.

With all that being said, Facebook could develop its own "tipping jar" and apply it to Facebook Live. It could also have developed its own Instagram or in-house VR headset if it wanted to. The company is not afraid to throw around billions for a company when it believes it can either monetize its large user base or leverage its technology. The question then becomes would Facebook be more compelled to look at something like YouNow which has a significant user base already, or something like Peeks where the user base is small at the moment (though growing at 6,000 users a day) but has the built-in payment technology?

I believe the latter would be the wiser choice. Under the buyout scenario, Facebook could redirect any livestreaming traffic to Peeks that would be driven by the incentive to generate tips. A YouNow acquisition would likely go in the opposite direction where Facebook tries to integrate it with its own payment processing system. Given Facebook's large and growing network of advertisers and diverse mediums in which to display ads compared to its relatively small and stagnant payments division, I am not so sure that the company has fostered the culture where monetization of livestreams would be an easy task to complete internally. Much of the company's best resources would have gone to maximizing ad revenue so far, and for good reason. But a mind like Mark Itwaru's might be exactly what the company needs to kickstart a massive growth in content-generated revenue.

Keek: The investment opportunity for speculative investors betting on the social commerce revolution

As I mentioned above, Peeks is essentially 30% owned by Keek through a Technology Platform Licensing Agreement between itself and Personas, the private holding company of CEO Mark Itwaru who owns the intellectual property behind Peeks. I have written several blogs on Keek since September 22 on Seeking Alpha that which I recommend investors who are unfamiliar with Keek read.

Trading in OTC and TSX Venture-listed stocks like KEEKF will be volatile and risky, but I believe that I have captured the major risks and opportunities in my post titled "Peeks: A Summary Of My Expectations, Opportunities And Risks", which includes an assessment of the state of the company's financials. I held an interview with Keek's CEO in my post titled "Twelve Questions With Peeks Creator And CEO Mark Itwaru" along with a short follow up interview in my post titled "Two Additional Questions With Peeks Creator And CEO Mark Itwaru". I strongly recommend that interested investors at least read these three posts if not my entire library of posts on the company.

As I mentioned above, Peeks went live with its full version on Halloween night. In the three weeks since then, it has already signed an agreement with Warner Bros. Records where it will showcase emerging artists. It has procured the broadcasting and monetization rights to over 500,000 short form videos and over 1,000 daily videos including content from media industry leaders such as National Geographic, Reuters, CBC, Road & Track, HollyScoop, CelebWire, Seventeen, Esquire and MakerStudios. After those two deals were already announced, Peeks engaged Los Angeles based PMBC Group to lead its product marketing and media initiatives, so investors can expect the agreements made with large players to continue.

While my hypothesis in this article is that Peeks, and thus Keek by extension, is a buyout target of Facebook, I am actually in no rush to see it happen. Management has forecasted only a $150,000 to $175,000 monthly burn rate on Keek as Personas has taken on three times as much of the costs. So if Keek is taking 30% of the revenue and only 25% of the cost, Keek shareholders benefit from having the company stay public for as long as possible. Keek will actually be profitable thanks to its stake in Peeks before Personas' stake in Peeks becomes profitable. And considering that the monetization model has been in place since day one, I don't expect it to be too long before profits are had.

Why would the CEO do this? As he stated in my follow up interview with him, he wants the public listing to do well because it is a reflection of his overall value. If Keek, and its 30% stake in Peeks is valued at a $300 million market cap, for instance, that would imply a total valuation of $1 billion for Peeks and Personas' 70% stake would be worth $700 million. In addition to being the CEO, Mark Itwaru owns about 35% of Keek on a fully diluted basis.

I believe that I have stated a fair case for an investment thesis in which risk-tolerant investors can use as a basis for their own due diligence on Keek. I remain confident that Keek will continue to run and I believe that anyone interested in a growing social media play that has had a proven monetization model from day one will agree with me. Whether that results in Facebook sniffing around in order to enhance its ARPU, another company kicking the tires or Peeks going at it alone, all scenarios should lead to a lucrative outcome for Keek shareholders.

As for Facebook shareholders, I think it is prudent to expect the company to start diversifying revenues. A tipping jar on its livestream and post content that is then shared between the company and the users that generate the content is very low-hanging fruit that the company absolutely needs to be taking advantage of if it wants to continue its high growth trajectory. Expect an acquisition in order to facilitate this opportunity.

Disclaimer: The author is long KEK on the Toronto Venture Exchange and retains the right to buy or sell Keek securities at any time. This article is for informational purposes only and the author does not guarantee its accuracy or completeness. It is not meant to be a recommendation to buy or to sell securities nor an offer to buy or sell securities. The author is not a broker, dealer or registered investment advisor and is not attempting nor intending to influence the purchase or sale of any security.

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