Facebook Scouting For More Acquisitions

| About: Facebook (FB)

eMarketer’s report on mobile advertising estimates Facebook’s (NASDAQ:FB) mobile advertising efforts to deliver strong results. According to their research, Facebook’s share of global mobile internet ad revenues is projected to grow to 15.8% this year. This is significant growth from the 5.35% market share Facebook had last year when it began mobile advertising operations. Despite its gains, Facebook is still significantly behind Google’s share of 53% for 2013.

Facebook’s Financials

Facebook’s mobile revenue growth also helped drive the previous quarter’s performance. Q3 revenues grew 60% over the year to $2.02 billion, ahead of market expectations of $1.90 billion. EPS of $0.25 also beat the Street’s target of $0.19 for the quarter.

Among key metrics, monthly users grew 18% over the year to 1.9 billion and daily active users grew 25% to 728 million. Mobile usage grew 45% to 874 million users and accounted for 49% of total revenues. Mobile accounted for 41% share for the previous quarter’s revenues and 14% for this quarter last year.

By segment, advertising revenues grew 66% over the year to $1.8 billion and payments, and other fees revenue came in at $218 million.

Facebook User Engagement

A recent survey of 8,650 teens in the U.S. by Piper Jaffray showed that 26% of the population ranked Twitter as the most important social network, compared with 23% who favored Facebook. A year ago, Facebook was the preferred medium, with a 42% following. Facebook has lost some of its sheen among teenagers due to privacy concerns, especially with teenagers unwilling to share their networks with their parents.

To help counter this decreasing interest, Facebook has launched several initiatives.

Last month, the market was abuzz with rumors that Facebook was interested in acquiring video and photo sharing app, Snapchat, for more than $1 billion. According to market reports, Facebook’s initial offer to buy Snapchat has not been accepted as Snapchat does not wish to be sold. While both sides have maintained silence, if Facebook were to acquire Snapchat, it may be able to successfully handle the issue of dwindling teen interest. Failing to acquire Snapchat indicates that Facebook is scouting for other acquisitions, especially to address the teen audience.

Facebook is also experimenting on additional analytics tools that will help with more targeted advertising. Facebook’s new technology is expected to collect data such as which ads a user’s cursor hovered over to determine what will attract the user’s to click through the ads. It has also invested in a new artificial intelligence unit and a speech recognition product. Facebook plans to analyze the content shared on its site to gather more insight into user behavior. Earlier this quarter, it acquired speech recognition technology provider, Mobile Technologies, for an undisclosed sum. Pittsburgh-based Mobile Technologies is a leading provider of speech recognition and machine translation solutions. Facebook plans to use Mobile’s solutions to offer additional ways for people to connect with each other and to expand photo recognition capabilities to voice recognition ones as well.

Facebook was also rumored to be in discussion with BlackBerry (NASDAQ:BBRY) for a possible acquisition. BlackBerry’s business may be bleeding but it still plays a significant role in the mobile segment. BlackBerry has of course been overtaken by iPhone and Android phones in terms of worldwide phone market share, but its secure network still remains a big strength. Recently, tech companies have acquired other failing phone companies as their ticket to the mobile world. Google (NASDAQ:GOOG) acquired Motorola Mobility and more recently Microsoft (NASDAQ:MSFT) acquired Nokia’s (NYSE:NOK) phone division. If the acquisition were to happen, Facebook too would be looking at a smoother entry into another fast-growing line of business. But given BlackBerry’s own state of affairs, I don’t believe they are a good enough acquisition target for anyone. This week, the acquisition talks fell through.

Facebook’s stock is trading at $49.12 with a market capitalization of $119.62 billion. It touched a 52-week high of $54.83 last month.

My analysis is that Facebook’s complete dependence on the advertising business model is a weakness. LinkedIn (NYSE:LNKD), in contrast, has a mix of business models, including subscriptions. It may be a good idea for Facebook to also start scouting for acquisitions that enable the company to diversify its revenue model.