More than 70% of Facebook’s (NASDAQ:FB) value depends on the advertising business and less than 5% of Microsoft’s (NASDAQ:MSFT) value comes from online ads. This metric could explain why Miscrosoft recently sold Atlas to Facebook. Atlas is a digital advertising service that tracks online purchases and provides insights about the usefulness of online ads using its proprietary data.  Microsoft is giving up on its ambitions of becoming a middle agent in the advertising industry similar to what Google (NASDAQ:GOOG) does. Instead, it will focus on putting ads on its own websites. On the other hand, Facebook could use Atlas as a tool to improve the effectiveness of its ads as well as better market its platform to advertisers.
Facebook has started to see success with its mobile monetization. It has tremendous opportunity to leverage its user data to better target advertisements as well as improve and fine tune its current ads, and Atlas could help with that. Heading into 2013, the company will continue to focus on further ramping up its mobile advertising and maintaining healthy revenue growth that has reinforced investor confidence in recent months.
Facebook’s Advertising Efforts Are Proving Successful
The number of ads within Facebook’s mobile feeds have increased significantly and their effectiveness is also driving its ad pricing up. The company launched a huge mobile advertising campaign for Wal-Mart (NYSE:WMT) during the holiday season. About 50 million ads on deals and discounts were rolled out to millions of Facebook users. Although the results were mixed, this marks an important step towards strengthening the monetization of Facebook’s mobile platform. While there was high level of user engagement, they also complained about unwanted ads. The company is also working on promoting ‘custom audience’, which basically combines Facebook’s user data and advertiser’s customer data to increase the effectiveness of target ads. The company is also focusing on app install ads. These ads were launched in October 2012, and are being used by one-fifth of the top 100 grossing iOS apps to accelerate growth.  Mobile device users spend a lot of time using apps and Facebook is looking to monetize this opportunity.
Atlas can complement Facebook’s ad efforts by giving it access to its proprietary data. Facebook will have the opportunity to better understand what type of ads are being successful outside its network, and how it can make sure that those customers buy goods and services through its social network instead. It will also help Facebook in marketing its platform to its customers by showing how these ads are leading to purchases.
We are in the process of updating our price estimate for Facebook in the light of recent earnings and will have an update ready soon.
Our price estimate for Facebook stands at $25, implying a discount of about 15% to the market price.Notes: