Facebook Q2 May Be Buoyed By Lightning Fast Ad Market

Jul.16.14 | About: Facebook (FB)

By Paul Shea

Facebook Inc (NASDAQ:FB) is in a prime position to beat expectations when it reports its earnings numbers next Wednesday. The prediction comes from a new report on the online ad industry which suggests a much faster growth trajectory than that predicted by most analysts. Facebook's good engagement and its entry into market like video are added advantages as the company continues to monetize its base.

According to a Sterne Agee report on Facebook the faster than expected growth in the digital ad world is of prime importance to the Menlo Park company. Mark Zuckerberg and team are continually increasing their share of the market, and any increase in the overall size is good for each and every player. Advertising is the base of Facebook business, and its investors should pay attention to the path of the overall market.

Facebook grows share as market speeds up

According to research used as the base of parts of the Sterne Agee report, Facebook is now the second biggest player in digital advertising, and the company's future is still looking bright. While Google (NASDAQ:GOOG) (NASDAQ:GOOGL) loses out because of its monopolistic size, Facebook is growing and consolidating.

The report puts Facebook as the beneficiary of around 8% of the digital advertising market. In mobile the company's position looks even better.

Facebook holds more than 20% of the mobile ad market, a number that doesn't touch Google's 50% share, but takes away from the company's power. On mobile Google actually has to compete with Facebook, and the company's share of the market is growing incredibly quickly.

Facebook, as can be seen from the above table, is growing at a much faster rate than Google and almost any other competitor. Amazon.com's (NASDAQ:AMZN) growth stems from the company's lack of any significant share, while Yelp (NYSE:YELP) has just entered a period of real monetization.

The implied revenue from that research gives Facebook a big head start on meeting its numbers for the current fiscal year. Consensus revenue expectations are at $11.9 billion for the full year, meaning the company would have to earn nothing from its other revenue streams in order to miss its target, assuming this research is correct.

Facebook shares head high

Shares in Facebook are already highly valued, however, so it's unclear whether the company's investors are willing to boost its price, even if digital ads grow much faster than anticipated. The analysts put a price target of $80 on the company's shares, a number that would be a new all time high at Menlo Park.

Whether or not Facebook can manage to continue to grow its share of the digital advertising market as these analysts expect isn't as important as the growth in the market itself. If the analysts are right in predicting that the market will grow faster than expected, Facebook is in for a good couple of years no matter what.

Costs are going to have to rise however, and investors need to judge the company's valuation against its competitors in order to have a good idea of its worth.

Disclosure: None.

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