What these changes are signaling is Facebook intends to go head-on against Google (GOOG) in the online and mobile advertising space with customized data on each individual derived from their involvement with Facebook. In fact, CEO Zuckerberg has already signaled "search" is also on the Facebook agenda. While this seems an outrageous intrusion in the privacy of its users, Facebook is apparently comfortable in putting this as an option from which users can ultimately opt out. Yes, this is a gutsy move, but based on previous experience, Facebook knows that many of its users don't understand the ramifications of this change and therefore virtually all users will do little to change their Facebook profiles and/or settings. The result will most certainly be a much more valuable advertising platform for advertisers with the rich data from the users' tracking info being embedded into the intelligent advertising platform.
The practice is known as retargeting and is used by many other advertising platforms. What makes this uniquely opportunistic to Facebook is the amount and quality of data it has on its users. This provides a much more valuable monetization opportunity to the advertisers on this platform.
Let's look at the numbers a new "intelligent" advertising platform can provide. We point to Vringo (VRNG) to see what value is created by making ads "smarter." In an exhibit in its recent litigation with Google, Vringo points to its ad smartening technology increasing GOOG's ad revenue by 20% which at 3.5% annual royalty would entitle it to $493 million. GOOG's revenue from ad revenues is estimated to be $40 billion using its latest 10Q which shows $33 billion for the nine months ending 9/30/2012, with the last quarter alone bringing in $11 billion. Also, GOOG represents 47.6% of the market share of online ad revenue, bringing the total revenue opportunity to $84 billion. If FB were to get only 10% of that revenue, that would be $8.4 billion, more than double its $6 billion of projected revenue today. What's even more compelling is that this is from the "old" desktop platform which most analysts are giving up on as dead. We could easily see this unleash a whole new life for FB. Maybe FB should buy Vringo to increase its leverage with GOOG as well.
Why is FB a buy? Besides the revenue opportunity being better than ever, FB has been hampered by the overhang of large stock sales and grants to investors and employees which are coming off of post IPO lock-ups. After more research into the much-publicized locked up expirations of Facebook insiders, employees, consultants shareholdings, an interesting comment posted in a Seeking Alpha article by its member SMJTRUST pointed out that many of the shares subject to lock-ups had already been sold through private vehicles to third-party investors prior to the IPO. He explains,
The shares were bought through a firm called "SharesPost." They were auctioning shares that "insiders" wanted to sell (for one reason or another), but the way it was set up is that you bought shares in a LLC that had a contract with the seller, that when the lock-up expired, the shares would be transferred to this LLC, and then the LLC would transfer them to the individual "Angel" investor. They are sitting in this account now, until I decide to move them to my "real" account. The minimum investment was $100K per transaction and no matter what you bid as far as price, everybody who "won" the right to buy would get the lowest settlement price.
We therefore suspect that this happened with a large portion of the shares that were expected to hit the market and never did.
The lockup expiration presents a counterintuitive set of facts to a situation which is normally considered to be a downward pressure on the price of shares of a company facing the expiration. With the large float now in place at FB, the enormous requirement to make a movement in the direction of the stock price makes Facebook "too big to short." This is why the short interest is diminishing as a percentage to the float. With bearish analysts reversing course, FB has new support from its underwriters bringing to bear much needed momentum and is now poised to have more opportunity to the upside. Moreover, with high frequency trading here to stay, the sheer daily volume in FB is more than enough to absorb the shares if owners want to sell them.