The average advertising revenue generated by Facebook for every 1,000 searches conducted on its website has declined from an estimated $8 to $5 currently. [1] Revenue per search (RPS) is primarily a function of the click through rate (CTR) on ads placed alongside search results, as well as the price paid by advertisers for every user click (CPC). We expect Facebook’s RPS to decline over time as Facebook is not yet a search engine at its core like Google (NASDAQ:GOOG), Microsoft’s Bing (NASDAQ:MSFT) or Baidu (NYSE:BIDU). It also not an open web portal like Yahoo (NASDAQ:YHOO) or AOL (NYSE:AOL) and requires users to login to run searches. Also the international mix of total searches increases will lead to RPS decline. While we expect Facebook’s RPS will fall to $3.20 per 1,000 searches by the end of Trefis forecast period, Trefis members predict a relatively flatter level of $4.70 per 1,000 searches. The member estimates imply an upside of 6% to our estimated market cap estimate for Facebook.
Our current valuation for Facebook is $45.10 billion.
Increasing International Mix in Total Searches
Revenue Per Search in the U.S. has always been more than in most international markets. We expect the international mix of total searches to increase going forward, which should be a drag on the overall RPS, even as we expect standalone RPS internationally to increase going forward.
A Social Networking Site or A Search Engine?
It’s unclear whether Facebook will be become a search destination like Google, Yahoo or Bing. If search becomes central to Facebook, than the nature of searches may become more commercial which will attract higher paying advertisers to advertise on Facebook. A risk is that search on Facebook remains an ancillary feature and that the nature of searches on Facebook will not be as attractive to advertisers.
Trefis Community Forecast
Trefis members expect Facebook’s revenue per search will decrease from $5.30 per 1,000 in 2011 to $4.70 per 1,000 by the end of the Trefis forecast period, compared to the baseline Trefis estimate of a decrease from $4.60 per 1,000 in 2011 to $3.20 per 1,000 during the same period. The member estimates imply an upside of 6% to the Trefis price estimate for Facebook’s stock.
See our complete analysis for Facebook’s and our recent coverage launch analysis here.
Notes:- Revenue per Search = (Facebook Search Revenues)/(Facebook Internet Searches). Data calculated based on excerpts from Zuckerberg Speech [↩]
