Here's How Facebook Is Beating Google

Jul.21.14 | About: Facebook (FB)

Summary

Facebook has done extremely well in 2014, and it looks set to continue this trend post its upcoming earnings report.

Facebook's performance is being driven by advertising gains, as the company is accelerating ahead of Google in this market.

Facebook is increasingly focused on its product development, which should attract more marketers to its base.

Facebook's earnings are expected to grow at a terrific rate, making it a solid buy.

Facebook (NASDAQ:FB) is on a terrific run in 2014. The social networking company's stock has already gained more than 27% this year, but there is no sign of a slowdown. Facebook is trying to be more than just a social network, it is trying to be one of the strongest advertisement networks as well. This is the reason why Facebook has been investing in its ad capabilities, both on the desktop and mobile, and is providing serious competition to Internet giant, Google (NASDAQ:GOOG) (NASDAQ:GOOGL).

So, with Facebook scheduled to release its earnings this week, what makes it a good buy even after a terrific run this year? Let's find out.

Making a mark in advertising

eMarketer expects worldwide mobile internet ad spending to reach about $32 billion in 2014, up 75% from last year. Facebook is already making the most of this growth. As eMarketer reports, Facebook's share of mobile ad spending in 2012 was just 5.4%, but this number grew to 17.5% in 2013. This year, it is expected that Facebook will command 21.7% of mobile ad spending, at the expense of Google. Google's mobile ad spending share has gone down from almost 53% in 2012 to less than 50% last year. In 2014, the search giant's market is expected to erode further, to less than 47%.

Quite clearly, Facebook is making rapid strides in mobile. It delivered robust year-over-year growth of 82% in advertising in the first quarter, its strongest annual growth rate in nearly three years. Mobile ads alone accounted for 59% of its ad revenue. In addition, it is expected that Facebook will overtake Google in display ads in the U.S. this year. According to a report on adexchanger.com:

"Although Google is the $4 billion darling of the US display ad space, players like AOL, Amazon and Facebook are closing in on that share.

Most noticeably, Facebook, which for the first time last quarter served more ad impressions on mobile devices than on the desktop, experienced a 50.5% increase in US digital display ad revenue last year to Google's 33.3% growth rate, according to eMarketer.

If eMarketer's estimations are accurate, Facebook has already pulled ahead of Google in US display ad spend. Although Facebook was nipping at Google's heels in 2012, totaling $2.18 billion in display ad revenues to Google's $2.26 billion, the social platform pulled ahead of the search giant last year totaling $3.28 billion in display ad revenue to Google's $3 billion.

Fast forward to the end of this year and Facebook is expected to reach some $4.8 billion in digital display revenues to Google's $4 billion. This is a markedly higher estimation than one year ago, when eMarketer forecasted Facebook would generate $3.35 billion in digital display ad revenues by the end of 2014."

Clearly, Facebook is growing rapidly on all fronts and has put Google under pressure, and looks set to take its ad crown going forward. This has been possible because of Facebook's smart strategies and product development.

Impressive strategies

Facebook is aggressively expanding its ad platform. It is focusing on developing its marketing/advertising platform for corporations, small and medium enterprises, and for entrepreneurs, who are increasingly using Facebook to promote their products and services through various ads, links, and referrals. Also, Facebook recently announced its new Connectivity Lab that should help the company develop technologies to expand Internet access globally and increase its addressable market in the process.

Facebook's Creative Labs project is expected to be another growth driver for the company. Additionally, Facebook is continuously upgrading its core products and businesses through Messenger and Instagram. In fact, Facebook believes that it has significant opportunities to develop new products, such as premium video, ads on Instagram, etc.

In line with this initiative, the company recently announced the acquisition of LiveRail, an online video advertising company. It is estimated that Facebook paid around $400-$500 million for the acquisition, but it is expected to enjoy a number of benefits as a result of this purchase. According to Forbes:

"LiveRail will continue to run as a wholly owned subsidiary under Facebook. After the deal closes, Facebook and LiveRail are going to integrate data with each other to improve user targeting and serve better ads. LiveRail has over 200 customer, including PBS, ABC, CBS, Univision, MLB, A&E Networks, Dailymotion and BET."

LiveRail should help Facebook bolster its position in digital ad spending further and allow it to compete with Google more effectively.

Valuation and takeaway

Moreover, a look at Facebook's valuation indicates that it is a growth pick. The stock currently trades at a trailing P/E of 88 and a forward P/E of 37, indicating robust earnings growth in the future. The company also has a very strong operating margin of 40.64%, way better than Google's 23.21%. Additionally, Facebook's balance sheet looks solid. It has generated operating cash flow of $4.79 billion in the last one year, along with levered free cash flow of $3.14 billion. Its total debt stands at just $392 million, easily eclipsed by its strong cash pile of $12.63 billion.

Moreover, its growth projections are also very bright. Analysts expect its bottom line to grow at a CAGR of 34% over the next five years, way better than the industry's average of 20%. Hence, Facebook looks like a solid growth pick, as it is establishing its dominance in advertising and is outmuscling Google in the progress.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.