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Summary

  • Facebook has experienced an almost 20% correction from recent highs.
  • Facebook's long-term growth drivers will remain linked with mobile.
  • Facebook's targeting of popular mobile companies evidences management's commitment to mobile growth.

Facebook's (NASDAQ:FB) recent price action has seen a recent all-time high of $72.00/share to a 17% drop, leveling to the current price of around $60.00/share.

(click to enlarge)Facebook March

The NASDAQ itself has experienced a turbulent month of March as well, as investors have been selling the tech-heavy index.

(click to enlarge)NASDAQ March

Does this sell-off present a buying opportunity for FB longs?

Any observer of Facebook must recognize that revenue generated from mobile devices around the world remains ripe for the company to harvest. From mobile sales processing, to in-app Candy Crush sweetener purchases, to tipping Starbucks (NASDAQ:SBUX) baristas through your smartphone, companies around the world are in a battle royale for the money to be made from people using their mobile devices. Facebook CEO Mark Zuckerberg said as much at the Mobile World Congress, explaining:

[Facebook] shows people why it's rational and good for them to spend the limited money they have on the Internet.

An observer of mobile devices over the last decade would also appreciate the widespread adoption by people around the world of smartphones, tablets and others. The evidence bears out the growth of mobile search, and the growth of advertising money targeted towards mobile users will continue. Facebook and Google (NASDAQ:GOOG) have witnessed a 105% increase in global mobile advertising spending before their very eyes in 2013. How has Facebook done on this battlefield?

One measurement would be its market share of the mobile advertising dollars, and on this metric, Facebook is in beast mode. The company has thrived, growing its share from 5.4% to 17.5% from 2012 to 2013, and its market share may continue to grow by some untold number this year. What is behind the stronger attraction to Facebook's offerings among mobile advertisers?

The truth is twofold; Facebook is popular among mobile users, with its portfolio of apps making up 20% of all apps used by mobile users. The second, is that Facebook has become a more fertile ground than competitors for relevant, narrowly-tailored ad targeting.

Facebook's trove of information on its 1 Billion users helps advertisers listen to and identify potential customers. Google's appeal to advertisers on the question of relevant search has been its algorithm and internet search foundation Google has used to, in our view, invent the market for advertising spending online, and dominating it for so many years. But Facebook's appeal is a step in a different direction; it offers potential customers identified as likely to buy based on the target demographic, rather than based on the words typed in a search bar. Combined with the fact that so many users spend so much time with Facebook, it is easy to see why the company is able to attract mobile advertisers away from Google.

But the story is far from over. Google generates 23.1% of its net ad revenues through mobile, and this figure may grow even further in 2014. And the two companies are so dominant in this mobile ad space that they accounted for 75% of the additional $9.2 billion spent last year on mobile. They have not only positioned themselves to be innovators on mobile devices (Google Maps, Facebook Paper) but also have the wherewithal to identify and subsume would-be competitors with their size (Instagram, Waze). So what would be key to Facebook carving out more of the mobile ad revenue from Google? Intuitively, to identify what Google does best, and go right for it: search.

When a user is logged into Facebook, the personally identifiable information, from biographical to the types of likes or interests listed in one's profile, characterized the landscape of the mobile experience. If Facebook could get the user to use Facebook search, rather than Google, or any other competitors, to find names of movies, places to eat around you, or real estate agents in your area, one would expect the company could employ the valuable information the user has shared to offer the most relevant of all results. The type of result someone of your age, interests, location, and endless clicks and likes on Harry Potter-related material would be most likely to search for. So Harry Potter, Inc. could come to Facebook and plop its big ad money for the new Harry Potter book in front of users most likely to engage with it. And, importantly, not only when the user seeks out the information. Instead, it is in front of a consumer who spends 4 hours flipping through his timeline. Research has also shown that mobile ad influence is quite high for "Introducing Something New" to consumers; advertisers recognize that when you introduce something new to someone through friends or through ads targeted to specific users most likely to engage, you can influence users to buy.

This makes these metrics (the numbers of users, the amount of time spent using Facebook, and whether advertisers realize this by spending money on Facebook advertising) some of the most important to look for and keep an eye on as the company reports, and as the industry continues to evolve.

Instagram, now passing 200 million users, is another key driver of growth for Facebook. Currently, only 9 companies have signed agreements to advertise on Instagram. The company is slowly rolling out both picture and video ads on the platform in order to harmonize the user reaction, which is likely to be worrisome. But when the platform is opened up to all companies for advertising, the sky is the limit on how advertising revenue will begin to be earmarked for Instagram.

With a notoriously high P/E of 92, investors are expecting Facebook to find the opportunities for growth. Shareholders expect Facebook to recognize where it can use its competitive advantage, the deluge of information on 900 million+ people, to flex muscle on competition and attract new and unforeseeable business. In tech, shareholders tolerate higher P/Es on that expectation of unforeseen profits, dollars that are not even a fleeting thought in the minds of management today. Given the correction, if we see a $55 print, Facebook would appear to be an attractive long-term investment. That would bring the company into a more reasonable valuation, especially given the long-term trajectory of Facebook's business in mobile.

Facebook has already experienced the shift to being a majority-mobile company when it comes to ad revenue. We are confident the management has recognized this, as acquisitions of mobile-focused companies like Instagram and WhatsApp (and the targeting of others like Snapchat) show they are going after where larger numbers of users are spending their time on mobile devices. Mobile advertising isn't going to grow at triple-digit levels for long, but clearly it is a growing pie, and Facebook and Google are hungry. By continuing to innovate, in addition to acquiring innovators in the process, Facebook expects to be competitive in this space for years to come. But it should not shy away from chipping at Google's search dominance.

Source: Facebook's Recent Flop, And Why Mobile Remains In Its Crosshairs