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

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. ^[1]

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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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1. Facebook Reports Second Quarter 2012 Results, Facebook IR [↩]