After hitting a low of $17.55, Facebook’s (NASDAQ:FB) shares have received some much needed support from the optimism created by its earnings results in the past few quarters, as well as some specific trading activities. Accelerated revenue growth and the ramp up of mobile advertising have been the key highlights of the company’s performance recently. Facebook’s management has tried hard to best showcase its initiatives and share its vision for mobile monetization in order to dispel investors’ concerns about the company’s ability to monetize its mobile platform. With solid execution, we believe the company could sustain high revenue growth due to its emphasis on mobile. Despite all of this, the stock is still nowhere near its IPO price of $38. Currently the market is valuing Facebook at $24-25, implying roughly a 5% premium to our price estimate of $23.30.
What could push the stock past its IPO price, or perhaps past $40?
It is not going to be easy and will demand much higher levels of monetization in the future. Facebook’s e-commerce and virtual gifts businesses are likely to remain small compared to its advertising business for the foreseeable future. Therefore, the company needs to increase ‘revenue per page view’ by offering higher number of ads per page or charging more for them as well as continuing to improve customer engagement to drive a higher number of page views.
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Revenue Per Page View Doubles (+$10)
Currently Facebook’s ‘revenue per 1000 page views’ stands at close to 30 cents. This figure has improved slightly in the last two years after falling sharply in 2010 due to the mobile boom. Facebook did not have a viable mobile monetization strategy back then even though most of its users continued to shift to mobile platform. It was only last year when the company’s mobile business started making a material contribution. Currently we forecast Facebook’s ‘revenue per 1000 page views’ to reach past 40 cents by the end of our forecast period given the slow growth we have seen in the past couple of years. However, if it more than doubles to roughly 65 cents, it could add close to $10 to our current price estimate.
What’s the company doing in this regard?
It appears that Facebook has found the right way to promote ads without hampering the user experience on mobile platform, which is evident from the sharp growth in its mobile advertising revenues over the past few quarters. Its feed based ads and app install ads have been successful and will continue to be the company’s focus in the near term. The number of ads within Facebook’s mobile feeds have increased significantly and better effectiveness is also driving the ad pricing higher. For instance, the company launched a huge mobile advertising campaign for Wal-Mart (NYSE:WMT) during the holiday season under which around 50 million ads focusing on deals and discounts were rolled out to millions of Facebook users. The idea is to make advertisements a natural part of Facebook’s content to minimize the disruption and tackle the problem of a lack of real estate for ads on small mobile screens.
The company stated that the mobile ad business is seeing growth across all geographies, especially in Asia. The mobile app install ads performed very well this quarter, and the company will continue to promote these. It makes sense for advertisements to direct users to apps instead of websites on mobile platform. About 3,800 app developers used Facebook’s app install ads to drive close to 25 million downloads during the quarter. Moreover, about 40% of the top 100 apps on iOS and Android operating systems were using these adds.  The company also stated that the cost per install is highly competitive.
Besides increasing the number of ads on mobile, Facebook has to fundamentally make its ads more effective in order to drive monetization growth. The company can leverage a vast amount of user data to help advertisers reach the right audience, and it is certainly doing so. Facebook offered certain metrics during its recent earnings call that advocate the effectiveness of advertisements on its social networking platform.
Monthly Page Views Per User Grow To 2,000 (+$7)
We estimate that Facebook’s ‘monthly page views per user’ stood at close to 1,250 in 2012, and we expect this figure to reach close to 1,600 by the end of our forecast period. However, if the figure jumps to 2,000 instead, it could add another $7 to our price estimate.
This implies that the company will need to make its platform even more engaging and useful. Its new Graph Search functionality can be a cornerstone to this strategy. However, the usability of Graph Search is restricted due to privacy of user data as well as inconsistent levels of activity across Facebook users. In order to make it successful and make money from it, Facebook will need to encourage users to frequently use the ‘like’ feature, as well as try to integrate some sponsored search links within the results of Graph Search.
Facebook also needs to make sure that its users use Graph Search as often as possible. To do this, the company will need to make the search results more meaningful. This can only be done by including a larger data sample. While Facebook may not tamper with the privacy aspect, which greatly limits the usage of Graph Search, it may certainly encourage its users to “rate” and “like” content on Facebook. Various companies and businesses will also have the incentive to encourage their customers to like their pages, promotions or products in order to appear prominently in Facebook’s graph search results.
The above gains would add another $13 to our price estimate of $23.30.Notes:
- Facebook’s Q1 2013 Earnings Transcript [↩]