Previously, Facebook (NASDAQ:FB) did not charge the companies for any offers they provided to the consumers who liked their official pages on Facebook. These offers, or ads, will now be charged for, as Facebook has ended the free marketing phase and is looking to better monetize its social network.  A minimum of $5 will be charged for each offer, and the bigger companies who wish to reach a larger audience will be paying even more.  We believe that this will not deter the advertisers from posting offers and over medium-term, will be additive to Facebook’s profits.
Ads Are Major Value Contributor
Text and display ads are the biggest value contributor to Facebook. The revenues from this business accounted for 85% of the total revenues in 2011.  We expect this percentage to decrease to 75% despite a continued growth in ad revenues. This is because we expect other businesses such as virtual goods and social commerce to grow at a faster rate as the market for these is still under-tapped. Despite a revenue contribution which ranges from 85% to 75% over the forecast period, text and display ads contribute 67% to Facebook’s value. This is due to the fact that about 11% to 12% of the value simply comes from the cash sitting on the balance sheet.
Charging Marketers Is The Right Move For Facebook & The Users
Charging for the consumer offers or coupon-like ads will provide an incentive to advertisers to create more appealing and targeted ads, as well as encourage them to come out with lucrative offers which are likely to be more effective. We don’t think that this move will discourage advertisers from posting ads since Facebook’s vast user base, social networking aspect and ability to target a particular demographic by utilizing the vast data pool are somethings that advertisers can not ignore in the future. The fact that Facebook will charge for these ads is an indicator of their effectiveness. This effectiveness is only likely to increase when the advertisers are charged. Besides making money for Facebook, this is going to beneficial to users who will get more attractive and targeted offers.
Our price estimate for Facebook stands at $28.20, implying a premium of about 20% to the market price.Notes: