Facebook Is Testing Sponsored Search Ads

Facebook (NASDAQ:FB) is trying out a new type of ad unit — Sponsored Search Results — which pop up in the search results box when you search for anything on the social network. They are context based and targeted based on the search query, the location and the profile of the user.

Given Facebook’s massive user base and the number of searches that are executed on its platform, Sponsored Search ads could generate a significant number of impressions, and given the fact that they incorporate both search-based and social targeting features, they could have a relatively high click-through rate, generating high ROI for the advertiser and more ad revenue for Facebook. ^[1]

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If this new type of ad unit takes off, it could be very lucrative for Facebook and could help it topple Google as the king of online advertising. Since ads account for a major portion of Facebook’s overall value, this is a very significant development for Facebook.

With innovations like these, Facebook might also be able to justify its relatively high valuation, and continue to maintain its high revenue growth rate, concerns about which have led to Facebook’s share price getting hammered in the last couple of weeks, just before its scheduled Q2 2012 earnings release.

Facebook generates most of its revenue from social ads, which account for around 70% of its overall value. We currently have a $33 Trefis price estimate for Facebook, which stands nearly 15% above its market price. It competes primarily with Google(NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and Yahoo (NYSE:YHOO) in the online advertising space.

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1. Sponsored search results on Facebook: I’m not sold, TNW [↩]