As Facebook (FB) reports its Q4 2012 and full-year results on Jan. 30, investors will be mainly watching the company's progress in mobile advertising. We believe that while mobile advertising will benefit from increase in number of ads within Facebook's news feeds, desktop advertising will gain from Facebook Exchange. In addition to this, Facebook's "Gifts" feature will aid its social commerce revenues. Although social commerce is a growing field, its value for Facebook is relatively low due to the sheer size of Facebook's ad business.
Going into 2013, the company will continue to focus on further ramping up its mobile advertising and maintaining healthy revenue growth that has reinforced investors' confidence in recent months. We also expect Facebook to lay greater emphasis on privacy and security of user data, as well as pose stronger competition to Google (GOOG) in terms of bidding for ads.
Mobile Advertising Should See Good Growth
In Q3 2012, Facebook infused fresh confidence in investors with impressive results, both overall and within its mobile division. The stock rose from a little over $19 to close to $26 over the course of just two to three weeks, registering an increase of 35%. Accelerated revenue growth and a ramp-up of mobile advertising were the key highlights of the company's earnings. During this earnings announcement, Facebook's management also outlined several initiatives that the company was taking and shared its vision for mobile monetization to dispel investors' concerns about its ability to monetize its mobile platform.
We expect the company to make significant progress in ramping up mobile ad business in the fourth quarter. The number of ads within Facebook's mobile feeds have increased significantly, and their effectiveness is also driving ad pricing up. The company launched a huge mobile advertising campaign for Wal-Mart (WMT) during the holiday season. About 50 million ads focusing on deals and discounts were rolled out to millions of Facebook users. Although the results were mixed, this marks an important step toward strengthening the monetization of Facebook's mobile platform. While there was high level of user engagement, the users also complained about unwanted ads.
Higher Engagement Should Drive Page Views
Facebook acquired Instagram, a popular mobile photo sharing platform for $1 billion in cash and equity in early 2012. Facebook will leverage Instagram's growing user base to enhance its own mobile photo offering and drive engagement on its mobile apps, enabling it to capture a larger share of the mobile advertising market, which is expected to be worth $17.6 billion by 2015. Compared to Q4 of 2011, Q4 of 2012 should show the impact of Instagram acquisition and other feature enhancements which will manifest in form of higher number of page views.
Facebook's newly introduced feature called "Nearby" is essentially a location service based on friends' recommendations, likes, and check-ins. This is similar to the service provided by Foursquare and Yelp, and will help in higher user engagement. This directly ties with ad-related revenues, which essentially depends on both ad pricing and the number of views or impressions
Social Commerce to Get Support
Facebook has been placing higher priority on e-commerce with some recent initiatives. The company launched its "Gifts" feature in late September, leveraging its acquisition of mobile commerce start-up Karma. This feature allows users to easily buy and send gifts to each other based on suggestions, and Facebook keeps a share of the purchases made. In addition, the company has also been testing a feature called "collections," aimed at promoting e-commerce on Facebook. With this feature, Facebook users can add items they like from certain retailers to their wishlist for purchase. Social commerce, which contributes less than 10% to Facebook's value, could see some boost from these new features.
Our price estimate for Facebook stands at $25, implying a discount of about 15% to the market price.
Disclosure: No positions.