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Executive summary:

  • Rapid ramp-up of Facebook's mobile advertising revenues during the last year has proved its "mobile ad targeting" technology.
  • Having such a proven technology, in a market where mobile monetization is increasingly becoming a tough task, offers a great business opportunity.
  • A recent move by the company showed that the company is all set to use the technology to get deeper into the mobile space.
  • Looking at the fate of Myspace, to have a revenue stream that doesn't depend on "number of users" will be an excellent de-risking move for the company.
  • If successful, the move will make the way for the company to achieve a multi-billion dollar revenue stream along with revenue diversification.

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Facebook's (NASDAQ:FB) CEO Mark Zuckerberg recently said, "we're a mobile company." In essence, what this means is that the company is willing to play a bigger role in the mobile space not just as a social media company, but also as a technology company.

To start with, the company intends to gain a foothold in the world of mobile advertising by offering its ad targeting tools/services to advertisers and other app publishers. To get deeper into the mobile space, and to use its mobile expertise to tap the broader mobile advertising market, the company recently made an announcement that it is working with a small number of advertisers and publishers to test its own mobile ad network. The test is aimed to deliver "Facebook targeted" ads to the apps that belong to other publishers. The new platform will act as an intermediate between the advertisers and app publishers. The company will allow the advertisers to expand their reach beyond Facebook by using the power of "Facebook targeting" for advertisers that deliver the ads to viewers based on their demographic factors such as age, location, gender, education and specific interests.

Mobile advertising market:

The mobile advertising segment is the part of global advertising industry. The global advertising industry primarily comprises of search and display advertisements. Due to the proliferation of mobile devices in recent years, mobile advertising is the fastest growing segment of the advertising industry. According to Gartner, global mobile advertising spending will reach $18.0 billion in 2014, up from the estimated $13.1 billion in 2013. By 2017, the market is expected to touch $41.9 billion.

Facebook's position: (Source: Form 10-K, FY 2013)

Supported by nearly 95 million monthly mobile active users, and over $3 billion (FY 2013) in mobile advertising revenues, Facebook is among the most prominent players in the mobile advertising space. Over the last year, the company showed an exceptional rise in its mobile users as well as mobile revenues. The company's mobile-only users grew 89% to 296 million in 2013 from 157 million in 2012, and its mobile advertising revenues grew over 550% to $3.1 billion in 2013 from $470 million in 2012. The company's huge success in the mobile space shows that the company is increasingly becoming an expert not only in the social media space but also in the mobile advertising space. In fact, the company is one of the very few companies that are successfully monetizing their mobile platforms to the desired extent.

Overall digital advertising market:

According to eMarketer, on a worldwide basis Google (NASDAQ:GOOG) and Facebook are the top two digital ad publishers, with 31.91% and 5.64% market share during 2013, respectively (see the table below). Due to the rapid growth in Facebook's mobile advertising revenues, the company's share in the global digital advertising market grew 37% (growth) to 5.64% (market share) in 2013. The key factor behind the growth is its rapid success in the mobile space.

Mobile advertising market:

The company's growth in the mobile advertising market is phenomenal. According to eMarketer, on worldwide basis, the company's share in the mobile advertising market grew 216% (growth) to 16.91% (market share) during 2013. The reason behind the growth is the rapid monetization of its mobile platforms (Facebook app and mobile website).

Conclusion:

This is not the first time that the company is trying to play a bigger role in the mobile advertising industry. However, in the past, the company tried to expand its reach in the industry through third party ad-serving platforms. For the first time, the company is trying to deliver ads to the apps that belong to other publishers through its own ad-serving platform. The company intends to offer its hugely successful ad targeting tools/technology through the new platform.

Hugely successful tools/technology:

The company's ad targeting technology helped it to deliver excellent results throughout the last few quarters. If the company hadn't been successful with its mobile ad targeting tools, the company might have reported much lower revenues in FY 2013. During FY 2013, the company reported an over six times increase in mobile advertising revenues. In fact, without the help of exceptional growth in mobile advertising revenues the company would have reported a less than $50 million increase in the revenues.

These figures not only show the rapidly growing importance of the mobile platform, but also show the effectiveness of the company's mobile ad targeting technology that allowed the company to capture a significant share in the mobile advertisement market in just two years.

The company is trying to enter in the mobile advertisement industry through its own mobile ad-serving platform at a time when the company is experiencing a slowdown in its overall growth.

Slowdown in the growth-rate:

For the last few years, the company is experiencing a significant slowdown in the growth rate. The growth in user additions (monthly active users) is showing a decline in the last few years from 39% in 2011, to 25% in 2012, to 16% in 2013. The slowdown is not just in the percentage terms but also in absolute terms as the net user addition for the company stood at 237 million, 211 million and 172 million for the year 2011, 2012 and 2013, respectively.

Valuations:

Due to some excellent results, the stock price of the company has showed a significant rise during the last year. Currently, the company is trading with a PEx of 109, and with a market cap of over $162 billion.

These valuations demand an exceptional growth from the company in the future. The company knows that it can monetize its user-base up to a limit, as its every attempt to monetize its user base affects the user experience negatively (most of the time). Thereby, the company needs to keep a balance between the user experience and userbase monetization. This limits the extent to which the company can monetize its user-base as the company can't afford to lose its users due to the declining quality of the user experience.

The company is well aware of the fact that with limited user growth, and the limited possibilities of monetizing its user base, it may have to look at new avenues for growth. The company also understands that to be a successful company, it not only needs to fulfill the expectations of its users but also of its investors. The users want a better user experience, and the investors want better asset monetization. Unfortunately for the company, these two things do not correlate with each other (most of the time). That is why the company is focusing more on the revenue streams that do not interfere with the user experience. The broader mobile advertising market is one such market where the company can meet early success due to its proven technological expertise that is evident from its recent success in the mobile space.

All in all, the success that the company experienced in the mobile advertising market in recent times gives the company enough confidence to get deeper into the market. Overall, an excellent step by the company as the company intends to tap another multi-billion dollar, high margin business opportunity. There is every reason for it to feel confident about its success in the market.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must consult its financial adviser before making any decision.

Source: Facebook: Diversifying Revenues