Facebook (NASDAQ:FB) has announced its plans to expand its ad targeting capabilities by utilizing user data generated outside its own platform. This will be similar to how Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO) have played in the online advertising market. Although this may cause some privacy concerns, the company is also going to make it optional for a user to opt out of such ad targeting.
Nevertheless, the bigger picture is that users are going to see more relevant ads targeting their interests that Facebook’s platform alone fails to capture. This will help the company sustain the tremendous growth in ad pricing it has seen in recent quarters. We estimate that close to 85% of Facebook’s value comes from text and display ads. We currently forecast Facebook’s average revenue per 1,000 page views to increase from $0.42 in 2013 to $1.02 by the end of our forecast period. However, if the company is able to grow its ad pricing by much more than we anticipate as a result of this move and increases its average revenue per 1,000 page views to $1.50 by 2020, there can be close to 40% upside to our price estimate.
How Improved Ad Targeting Is Helping Facebook
Improved ad targeting has helped Facebook deliver strong ROI (return on investment) to marketers and advertisers. This, in turn, has helped it command higher priced ads. As an example, the company’s ad revenues jumped 82% in the first quarter of 2014. This was primarily attributable to a growth of 118% in Facebook’s average ad pricing. This was much higher than Q4 2013′s ad pricing increase of 92%, despite the tougher year-over-year comparison. This resulted from the growing proportion of feed-based ads that are aesthetically pleasing, highly targeted and less annoying as they appear to be a part of Facebook’s usual news feed. This leads to higher engagement, which encourages advertisers to pay more.
It must be noted that mobile has been the primary focus of this shift in the ad strategy. Instead of launching new ad products, Facebook seems to be focusing on improving its current ones. More specific audience targeting, higher engagement and better click through rates can give Facebook strong leverage when it comes to negotiating ad prices with advertisers. About 55% of daily active users are logging in only from mobile devices, and mobile platform accounted for 59% of Q1 2014 ad revenue. Since much of web browsing happens on mobile devices these days, it implies that the new move of utilizing data from outside its own platform is bound to produce positive results for Facebook.
Disclosure: No positions.