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Growth in mobile revenues, the success of feed-based ads and higher investment in human capital were the highlights of Facebook's (FB) Q4 2012 earnings. The company saw the ad revenue contribution of mobile platform increase from about 14% in Q3 2012 to 23% in the fourth quarter. While this led to sustained high growth in revenues, margins shrunk as the company incurred higher costs due to higher headcount and infrastructure related expenses.

Facebook is seeing more success with its mobile monetization. It has tremendous opportunity to leverage its user data to better target advertisements, as well as improve and fine tune the current ads. Going into 2013, the company will continue to focus on further ramping up its mobile advertising and maintaining healthy revenue growth that has reinforced investor confidence in recent months. There will be close to 50% growth in costs, and margins will decline as Facebook intends to hire aggressively to support the development of host of features including gifts, graph search, custom audience and app-install ads.

The usage on desktop is declining and Facebook is going to spend a major chunk of its resources in optimizing its business model on mobile platform.

Facebook's Advertising Efforts Are Proving Successful

The number of ads within Facebook's mobile feeds have increased significantly and their effectiveness is also driving the 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.

The company is also working on promoting "custom audience," which basically combines Facebook's user data and advertiser's customer data to increase the effectiveness of the ads, by improved targeting. The company is also focusing on app install ads. These ads were launched in October 2012, and are being used by one-fifth of the top 100 grossing iOS apps to accelerate growth. Mobile device users spend a lot of time using the apps, and Facebook is looking to monetize this opportunity.

Expansion in Asia and Latina America has driven user and supported the growth in ad impressions. Facebook's overall revenue growth is almost solely related to this expansion and increase in number of ads, and not to pricing. In fact, the ad pricing suffered 4% drop in the fourth quarter compared to same period a year ago due to expansion in emerging markets. In the developed markets, the company saw significant improvement in pricing. As Facebook further penetrates these markets, the overall growth will slow down and the impact of ad pricing change will be more visible.

There is a clear indication that Facebook is focusing on increasing its revenue per page view with increased effectiveness of ads. You can modify this forecast above, to see its impact on Facebook's estimated value.

We are in the process of updating our price estimate for Facebook in the light of recent earnings and will have an update ready soon. Our price estimate for Facebook stands at $25, implying a discount of about 15% to the market price.

Disclosure: No positions.

Source: Facebook's Revitalized Ad Growth And Expansion Efforts Highlighted In Earnings