One of the biggest fears which investors faced at the time of the Facebook Inc. (FB) IPO back in 2012 was its future in mobile advertising. The IPO turned out to be quite disappointing, but since then, the company has worked on its mobile strategy and has not only proven all skeptics wrong but has been able to increase its mobile revenues manifold. Facebook stock analysis reveals just how attractive the company has become on the back of its successful mobile strategy.
Mobile advertising now forms the core of Facebook’s growth and has accounted for over 90% of revenue growth within the firm in the past seven quarters. In the past three months, mobile advertising totaled $2.5 billion, making up two third of the advertising revenue and 64% of total revenues of $3.85 billion. Facebook’s Q4 earnings of 54 cents per share beat the analyst expectation of 49 cents per share - giving a bullish trend to the stock.
Growth in Mobile Ads
One can find the importance of mobile advertising by looking at the following chart.
Fig 1: Facebook’s revenue in different segments. Source: Facebook
Facebook had 745 million daily active mobile users. This forms a major chunk of its active users and shows the huge change undergoing within the social and mobility space. This rise in mobile advertising revenue closely followed the global switch to smartphones. As more users shifted to smart devices it was imperative for Facebook to have a strong mobile monetization platform. There were talks within the management and investing community of how to start the mobile advertising segment since 2010. By 2011 the smartphone penetration in the developed world had reached a tipping point. Facebook’s response in 2012 was quick and effective with mobile revenues showing healthy growth thereafter.
Fig 2: Penetration of smartphones in US market. Data by Statista
The biggest issue which Facebook faced was balancing the needs of its advertisers and at the same time making sure that its mobile user base is not bombarded with huge number of advertisements. Being a social networking platform where people come to connect with their friends and not see advertisements made its task more arduous. However, Facebook has been able to walk the tightrope and has proved the success of its platform in engaging a huge mobile user base and at the same time attracting advertisers.
Biggest Competition In Mobile Advertising
When dishing out its mobile advertising it had to face huge competition from Google which had cornered over half of all mobile ad revenues. However, it has fared excellently in this department also by grabbing a good portion of market share from other platforms.
|Mobile internet ad revenue share, 2012-2014, % of total|
Data By: eMarketer.com
This revenue is just the tip of the iceberg, and we should witness good growth in the future as the consumption of data increases on smart devices throughout the world.
Fig 3: Estimated rise in mobile ad spending in the next few years. Data by Statista
Areas of Improvement
One of the biggest sources of worry for the firm is low monetization rate within emerging markets. Although the company boasts of a user base of over 1.3 billion people, its actual revenues are coming from a much smaller percentage of users. This is because per user revenue is widely different in different geographies.
Fig 4: Revenue per user in different geographies. Source: Facebook
Facebook earned $9 per user from users in US and Canada - compared to a mere $1.27 per user from Asia-Pacific users. This difference becomes all the more important when we look at the user growth metrics. Most of the user growth in 2014 came from the emerging markets, whereas US and Europe contributed a very small percentage of user growth as the market is already saturated. This makes it important for Facebook to aggressively pursue higher revenue generation methods in these regions to sustain high growth.
Facebook has been able to connect and engage over a billion people on its platform, and at the same time, has newer products like Instagram and WhatsApp in its arsenal to sustain a higher engagement among its users. This should ensure that Facebook is on a high growth path in the short to medium term outlook. Its mobile strategy has played out perfectly showing good revenue growth without the loss of user engagement. Overall, the firm is placed in a good position to take advantage of its huge user base in delivering high growth and giving good returns to its investors.
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