Facebook’s Profits Jump As Advertisers Flock To Its Platform

by Trefis Team
-17.53%
Downside
77.62
Market
64.02
Trefis
FB
Facebook
Rate   |   votes   |   Share

Facebook‘s (NASDAQ:FB) second quarter results clearly demonstrated its focus on three main areas: mobile, marketers and ad products. The company registered strong revenue growth driven by an astonishing increase in its average ad pricing and a higher number of advertisers using its platform. This led to a significant jump in gross margins as well, which we now expect to be around 84.7% for the full year 2014 compared to 76.7% last year. Overall, the company’s business showed no signs of a slowdown as it continued to grab mobile ad market share from rival Google (NASDAQ:GOOG). We have updated our price estimate for Facebook to $65.50 as a result of improved margins and strong outlook.

Our price estimate for Facebook stands at $65.50, implying a discount of about 10% to the market.

See our complete analysis for Facebook

Mobile Is Spearheading Ad Revenue Growth

Facebook’s ad revenues jumped 67% in Q2 2014 over the same period a year ago. [1] This was primarily driven by 151% increase in mobile ad sales as desktop ad revenue growth remained in single digits. [2] Mobile now accounts for 62% of Facebook’s quarterly ad revenues, which is a big leap from the situation 1.5 years ago. [2] So what’s driving this unprecedented growth in advertising business on mobile?

The first reason is the increased proportion of feed-based ads. As the overall usage continues to shift from desktop to mobile, the total number of ad impressions are decreasing but average ad pricing is going up. In other words, Facebook has made the interface less cluttered but more effective for marketers, which has helped it deliver higher ROI (return on investment) to them. This, in turn, has led to a strong growth in its average ad pricing. In the second quarter of 2014, the average price per ad shot up by 123% which more than offset the impact of 25% decline in the total number of ad impressions. [2]

The second reason behind Facebook’s success is its continuous efforts to bring more advertisers onto its platform. Currently, about 30 million small business have Facebook pages. [2] The number of active marketers stands at 1.5 million as of today, which is 50% higher than what it was a year ago. [2] Perhaps Facebook’s greatest achievement is making its mobile ads as interesting and likeable as the regular Facebook content. This has led to higher user engagement, which is of great interest to advertisers. Some of the features such as custom audience and website custom audience have been adopted quickly by advertisers, and have enabled better targeting.

How The Future Looks Like

We currently forecast Facebook’s annual revenues to jump from $7.87 billion in 2013 to an estimated $12.5 billion in 2014. We further expect the figure to reach past $40 billionĀ  by 2021. This growth will be accompanied by increasing margin due to greater operating leverage. We expect Facebook’s EBITDA to increase from $4.85 billion to close to $30 billion during the same period. Although these figures may seem exorbitant at the moment, they are necessary to justify our price estimate of $65 which is still below the market price. Given the kind of ad pricing growth and attention it is witnessing from advertisers, Facebook certainly has the capacity to grow its profits many-fold and give Google a run for its money in mobile advertising market.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Get Trefis Technology

Notes:
  1. Facebook’s Earnings Presentation []
  2. Facebook’s Q2 2014 Earnings Transcript [] [] [] [] []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!