Facebook (NASDAQ:FB) has made several efforts to improve monetization and sustain its high revenue growth. This resulted in a substantial surge in the stock in November. In its Q3 2012 results, Facebook reported significant progress with mobile monetization and now the company may further fuel its ad revenue growth with a deal with Microsoft (NASDAQ:MSFT). Facebook is reportedly in talks with the software giant to buy Atlas Solutions, which can help Facebook post its ads on third party sites.  The current ad ecosystem is confined to Facebook’s social network. Mind you, this is not small given that the company is at a run rate of over 14 trillion page views annually. However, there is an opportunity to do more by using third party sites, similar to what Google (NASDAQ:GOOG) has done, and thus reduce monetization pressure due to growth in mobile.
See our complete analysis for Facebook
Facebook’s revenue per 1,000 page views (RPM) is a critical driver to its valuation given that almost 65% of our Facebook’s estimated $68 billion value comes from the advertisements business. This metric dropped sharply in 2010 when mobile growth exploded. Facebook wasn’t serving ads on its mobile platform at that time and therefore while page views increased, they did not proportionally convert into higher advertising revenues. However, 2011 saw mild growth and that seems to have continued in 2012 as well.
Currently we forecast Facebook’s RPM to grow slowly and reach a figure of 35 cents by the end of our forecast period. However, if this figure can reach the peak levels of 47 cents seen in 2009 in the next 6-7 years, there can be upside of more than 20% to our price estimate.
This can be achieved through a combination of successful ad monetization (ads within feeds) of the mobile platform and use of third-party sites. On the other hand, there could be downside of similar proportions if monetization dropped to 25 cents instead as a result of the company’s failure to keep monetization as page views shift to mobile.
Our price estimate for Facebook stands at $25, implying a discount of more than 5% to the market price.Notes:
- Facebook in talks to buy Microsoft ad technology: reports, Reuters, Dec 6 2012 [↩]