On the face of it, an immense community of more than 900 million monthly users is remarkable by any measure. These users are constructing their "social graph," building new habits in the way they communicate with friends and acquaintances while sharing applications and content. More than half of these users interact with the Facebook platform each day.
Advertisers have dipped their toes in the water, spending more than $3.1 billion last year on a platform that we would characterize as immature and prepubescent--many agencies and marketers aren't certain how to measure return on investment for their ad spending. Still, Facebook is capturing data and online/user activity in a comprehensive way about which competitors can only dream. We expect the company to capture a massive share of the online advertising market while developing new revenue streams through local advertising, payments, and commerce. In spite of our bullishness, we expect revenue growth to be highly variable.
Although we believe optimism is warranted, the market might not appreciate several near-term challenges facing the company. Facebook's 901 million monthly active users only tell part of the story, as more than 500 million users interact with the Facebook platform every day. The company is already wildly profitable by most standards and generated $3.7 billion in revenues and 47% operating margins in 2011 on the back of strong growth in advertising ($3.2 billion) and other revenues ($550 million), which consist primarily of payments to third parties, including Zynga (ZNGA).
We expect the company to translate its immense user base and competitive advantages into massive growth in revenues and cash flows over the long run, but the ability to further monetize current users represents a significant hurdle which Facebook must overcome. These challenges notwithstanding, we expect the stock to trade well above our fair value estimate after the IPO, though the focus on short-run challenges might lead to stock price declines and ultimately create a very interesting buying opportunity for the shares at a later date.
Even though Facebook's first-quarter results reflected seasonal weakness, the firm's revenue growth and profitability is commendable. Quarterly revenues declined 6% sequentially, demonstrating that social advertising is already subject to the same seasonal weakness the broad advertising market experiences. Still, Facebook's revenues of $3.7 billion in 2011 increased by 88% versus those in 2010, and the firm's operating margin was 47%, the highest of any company on our Internet coverage list. This remarkable profitability certainly demonstrates the efficiency of Facebook's business model. Notably, sales and marketing expense was 11.5% of revenues, compared with 22.5% for Yahoo (YHOO) and 12.1% for Google (GOOG) in 2011.
Although we don't expect Facebook to expand its operating margins, the current level of profitability allows the firm to continue to reinvest in the business to stave off competition, produce innovative forms of advertising, and support new revenue streams.
Facebook's massive base and engagement arguably creates advertising opportunities that capture reach and target based on specific criteria. Growth in Facebook's user base across geographies has been impressive. Monthly active users were 901 million at the end of the first quarter of 2012, 33% more than reported in the year-ago period. These users are logging into Facebook at least once a month, communicating with friends, posting pictures, and using applications. We believe hundreds of millions of users face switching costs that keep them from leaving Facebook. People are unlikely to leave unless they can take their network of friends, content, and apps with them.
The company's growth in mobile usage has been equally impressive, particularly considering that Facebook was very slow to market with a downloadable application. Although the company has not actively developed its mobile advertising capabilities, we expect a substantial bulk of mobile advertising dollars to flow to Facebook within the next couple of years.
