In my prior article on Facebook (FB) titled "Facebook: At a Positive Inflection Point," I argued that the popular bear case, regarding Facebook being negatively impacted by the shift in consumer usage to mobile devices, was flawed. I also highlighted why I thought Street consensus estimates appeared overly conservative. In this article, I would like to highlight a few more reasons why I am still bullish on Facebook's stock.
My investment process involves paying special attention to statements made by top management and board members. After my last Facebook article, Charlie Rose interviewed COO Sheryl Sandberg and board member Marc Andreesen. These insiders made several statements that gave me even more conviction than I had previously.
First, Sandberg said that newsfeed ads were eight times more engaging than desktop right rail ads. I knew that newsfeed ads were more valuable, but I was blown away by that figure! Engagement per ad is directly correlated with how much revenue Facebook generates since most of Facebook's advertisers only pay the company when users click on the ads. This implies that if a user goes from accessing Facebook on a desktop to using a mobile phone, Facebook can actually make much more money from that user. When I access Facebook on my desktop PC, I usually see 5 right rail ads and, at most, 1 newsfeed ad. When I currently access Facebook on my iPhone, I usually see at least 3 ads in the newsfeed. Given Sandberg's comment, these 3 mobile ads on the mobile device are worth the equivalent of 24 (8 x 3) desktop right rail ads!
Second, Sandberg stressed that the company is seeing no difference in usage with consumers that have newsfeed ads versus consumers that do not have newsfeed ads. This was a VERY important statement since one of the biggest risks with Facebook is whether users will revolt as the company increases monetization.
Third, Andreesen pointed out how he recently went to an all-hands meeting at the company and was surprised to see the employees give CEO Mark Zuckerberg a standing ovation. Andreesen added that he has never seen a CEO get a standing ovation at an all-hands meeting before. I found this interesting because one of my fears had to do with employee turnover and motivation. I was worried that employees would be disillusioned by the way the stock performed since its IPO. Motivation clearly does not seem to be a problem if employees are giving the CEO a standing ovation. Moreover, it is more likely that employees would do this if business trends are in fact improving.
Another risk that I was worried about was with respect to pricing on the desktop right rail ad inventory. Given the increased inventory from more newsfeed ads, I was worried that Facebook's right rail inventory would get priced at significantly lower rates just because of supply and demand. My own experience with advertising my recently published book on Facebook gives me some confidence that pricing for the right rail inventory is not falling dramatically. If it was, then I would be getting much more ad impressions and clicks on my ads for the same daily budget and bid price. This is not happening. Facebook's new ad exchange product is designed to increase engagement with right-rail ad inventory and may be one reason why right rail ad inventory pricing does not seem to be falling much.
Facebook currently has less than 1% share of the global advertising market. Over time, the company's share will trend towards its much higher share of media consumption. As it grows, operating leverage should be very high given high gross margins and largely fixed operating expenses.
Additional disclosure: The author may make trades in securities mentioned without notification. The information contained in this article is impersonal and not tailored to the investment needs of any specific person. You should consult with a professional where appropriate. The author shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. The Author currently pays Facebook, Twitter and Google for placement of advertisements for his book.