Facebook Shares Jump 30% - As It Changes Course

| About: Facebook (FB)

Unless you have been away from electronic devices that communicate with the outside world over the last 24 hours, you have been bombarded with the biggest "turnaround story" to hit Wall Street in quite some time. On Wednesday evening Mark Zuckerberg opened the Facebook (NASDAQ:FB) conference call with news that the company had beat analysts' expectations for Q2 by a landslide. Even more newsworthy was the fact that they did it with mobile ads, which were 41% of total ad revenue. And he believes the mobile numbers will provide even more revenue in the future:

We now have more daily actives on mobile than on desktop. Nearly half a billion people use Facebook on their phones everyday and soon we'll have more revenue on mobile than on desktop as well.

Earlier on Wednesday, CNET estimated that Facebook would gain 33% of its advertising revenue from mobile, which would be a "remarkable achievement," and it "comes in the nick of time to save Facebook from a decaying desktop business." So if analysts thought that 33% would be remarkable, 41% is incredible.

How did they do it? The Facebook team overcame the "screen is too small" obstacle with News Feed and Mobile App Install ads. According to Company COO Sheryl Sandberg's remarks on the call (link above):

During the second quarter we increased the number and type of ads in News Feed. At the same time, our click-though rates and cost-per-click metrics for News Feed ads remains strong during the quarter providing a good indicator of healthy and growing advertiser demand and continued user interest in these ads... And revenue from mobile app install ads also continues to accelerate. The app market is relatively new but it is already large and growing very rapidly. We believe that Facebook is one of the most effective ways for developers to acquire new customers at competitive rates. We're increasing our share and helping to grow this market.

Tapping into this growing mobile app market opens a whole new type of advertising for Facebook. The theory is that in the future there will be no company web addresses. Everything will be accessed through a company's app. According to David Kirkpatrick, CEO of Techonomy and the author of "The Facebook Effect" (via an interview with Breakout):

People who have apps have got to figure out a way to get people on their mobile devices to tell them about it. Anybody who has an app they're going to want people to use, Facebook is the place to tell them about it. That's a huge future category.

Earlier this month I wrote that analysts were suddenly getting bullish on the company, and if Facebook beat expectations it would really move the stock. However, I did not anticipate this type of a "beat." Revenue for Q2 2013 was up 53%, and income jumped from a huge loss in Q2 2012 to a gain of $562 million in 2013. The company ended the quarter with $10.3 billion in cash and investments:

Facebook Q2 Results

Reported in millions

Q2 June 30,

YTD June 30,






$ 1,184

$ 1,813

$ 2,242

$ 3,271

Costs and expenses:

Cost of revenue





Research and development





Marketing and sales





General and administrative





Total costs and expenses





Income (loss) from operations





This sent the stock up 30%, to close at $34.36 on Thursday. The volume was ten times the normal volume. But will this hold? Obviously there will be some profit taking. That is a huge one day gain for traders:

Volume: 364,866,799
Avg Vol: 37,580,200

Chart forFacebook, Inc.

But the future for Facebook looks very bright now. The inability for advertisers to reach the millions of mobile users was holding the company back. Now instead, Facebook has catapulted to the front of the line where the action is. The site has become a haven for all sizes and types of businesses. There is the smallest business person who sponsors a post for $7 alongside huge companies like Apple (NASDAQ:AAPL) that have over 21 million "Likes" on pages that show off its newest products.

And then there is the Instagram video ad revenue that should start rolling in at the end of the year. FOXBusiness recently reported that UBS is very bullish on Facebook because of these new ads that will begin appearing on Instagram. Daily video ad slots are estimated to cost around a million dollars each:

The bullishness reflects new ad potential for Facebook, with UBS analyst Eric Sheridan projecting video ads would begin showing up through Instagram later this year...

"Our estimates assume that Facebook will be able to monetize daily video ad slots in the seven-figure range," he said, predicting that ads will begin appearing on Instagram during the second half of 2013.

Combine this massive revenue with the new found mobile ad revenue, and FB will be unveiling historic earnings results each quarter from now on. If you missed buying this stock when the price was 30% lower, you are not alone. Many analysts were scrambling on Thursday to up their targets. There could be a dip on Friday due to profit taking, but don't count on it. Investors like cash, and Facebook has cash.

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

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