Facebook's Near A Billion Users But Monetizing Mobile Ones Is A Problem

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Facebook (NASDAQ:FB) has reported its financials for Q2 2012, its first earnings release since its IPO in May, and they were pretty disappointing. It reported revenue of $1.18 billion, and a net loss of $157 million, which can be attributed primarily to the recognition of stock based compensation when it went public. Facebook’s stock took a hit following Zynga’s dreary Q2 earnings, and then another after it reported lower than expected revenue growth and a net loss. It is now trading at an all time low of below $24. While Facebook has been making significant progress on the product front and continues to add to its already massive user base, it hasn’t quite figured out the monetization puzzle yet. Moreover as it leans more on mobile for its user growth, monetizing these users is proving to be more challenging that expected.

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Social ads & the mobile puzzle

Its monthly active users grew 29% to to 955 million while its daily active users grew 32% to 552 million. Its mobile user base continues to grow; it expanded to nearly 543 million, up 67% year-over-year. Herein lies Facebook’s dilemma — while it has no issues on the user growth or engagement front, more than half of its users access the platform through mobile, an area which Facebook has hardly been able to monetize yet. While it continues to roll out features which will keep users tied to its platform and boost engagement levels, none of that really matters until it can make money off them.

It is working on web based as well as mobile advertising units which can be targeted based on a user’s social preferences and maximize ROI for advertisers. Once it demonstrates the viability of social advertising compared to say, search advertising by Google (NASDAQ:GOOG), and roll out ad offerings which enables brands to reach its mobile and web user base, we expect its advertising revenues to jump significantly. It is already seeing some success with the mobile sponsored stories format.

Platform & payments

The other great opportunity for Facebook is its platform. It could become the default platform for web developers looking to reach billions of users. By providing the platform and reach, it can then monetize those apps by also offering advertising solutions and enabling payments for their developers. This would not only enable it to take a cut of any transaction executed on its platform, but also generate even more data which it could use to improve its ad revenue and make the platform more engaging.

Facebook generates most of its revenue from social ads, which account for around 70% of its overall value while virtual transactions and payments account for around 15%. We currently have a $28 Trefis price estimate for Facebook, which stands nearly 20% above its market price.

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Led by MIT engineers and Wall Street analysts, Trefis.com helps you understand how a company's products, that you touch, read, or hear about everyday, impact its stock price. Surprisingly, the founders of Trefis discovered that along with most other people they just did not understand even the seemingly familiar companies around them: Apple, Google, Coca Cola, Walmart, GE, Ford, Gap, and others. This might include you though you may have invested money in these companies, or may have been working with one of them for years as an employee, or have consulted with them as an expert for a long time. Disagree? Consider these questions: •What % of Apple's stock price is iPhones? (Q: Is it 5%, 25%, or 50%?) •What % of Dell's stock price is Dell Notebooks? •If Bing took half the market share from Google Search, what % upside could there be for Microsoft’s stock? On Trefis you will get answers to questions like above. You can play with assumptions, or try scenarios, as-well-as ask questions to other users and experts. The platform uses extensive data to show in a single snapshot what drives the value of a company's business. Trefis makes the same content, data, and tools that are currently available only to professional investors today, accessible to everyone. Importantly, it makes the extensive data/tools easy to use and understand, allowing investors to leverage the platform in their decision making much more efficiently than anything else available. Trefis is currently used by hundreds of thousands of investors, company employees, and business professionals.

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