A Friend Request from Facebook
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Facebook (NASDAQ: FB) jumped more than 20% on Wednesday after the company reported better than expected sales and earnings. Wall Street tends to overreact when it comes to quarterly announcements, but the company showed some important improvements in areas like mobile ads, and this can have significant implications when it comes to its long term business opportunities. Facebook´s friend request is starting to look much better.
Show Me the Money
Facebook is a very successful social network, and the company is still growing its user base like crazy; it now has 1.01 billion users, which is a 26% increase versus the previous year. The problem is monetization, or how to make money from those users.
Google (NASDAQ: GOOG) is the king of online advertising, because it has a dominant position in search, which is an almost ideal product to monetize through ads. For instance, when you are “Googling” Mexican food, it makes a lot of sense to be shown ads of different Mexican restaurants in your area. Being the leader in mobile platform with Android, the online search giant has gained a privileged position in mobile too.
LinkedIn (NYSE: LNKD), on the other hand, has developed a diversified strategy. The social network for professionals makes money from different services like hiring solutions for employers, job search for candidates, online advertising, and premium subscriptions. LinkedIn has demonstrated that it has different sustainable venues to make money, so the stock has done much better than Facebook since its IPO.
The effectiveness of Facebook´s ads on desktops has been questioned by some clients, but the big doubts regarding advertising for Facebook are in relationship to the shift towards mobile. Until the end of February, the company was not even showing ads on mobile, so Facebook´s ability to monetize its mobile platform was legitimately brought into question.
Precisely in that area is where Facebook delivered a very pleasant surprise: mobile ads represented a 14% of total ad revenue in the last quarter, which is materially better than what most analysts expected. Mark Zuckerberg sounded very optimistic about mobile during the press conference, saying that 600 million people connect to Facebook via mobile devices and the opportunities for monetization in that segment are really exciting.
Facebook is Innovating
It's still too early to tell if Facebook will be successful at monetizing mobile, and the real test will come with time, once users and advertisers have the chance to adapt to these methods and evaluate their effectiveness. But the recent data is certainly encouraging.
Facebook is implementing a wide variety of initiatives to monetize its user base in a more efficient manner. Mobile Ad Network is a service designed to improve the targeting of ads by capitalizing on the enormous amount of information the company has about its users; this should have a positive effect on relevancy and effectiveness of those ads.
App install ads is an advertising product sold to app developers; it´s designed to show their app's name and description, including other important information like customer rating and friends who use that application. When the user clicks the “Install Now” button he gets directed to the App Store or Google Play market so he can easily download the app. Applications are an exciting growth business in mobile, so Facebook could position itself as a leader in a very attractive market with this new product.
The company has recently announced Facebook Gifts: a new online gift store which wills users to purchase gifts via desktop and mobile platforms. The product does make sense, and it has some important advantages: you don’t need the user´s address, Facebook handles that part by arranging delivery with the recipient. Also, the person is notified right when the gift is selected as opposed to having to wait for delivery; this makes the Facebook Gifts an ideal tool for last minute presents.
Online commerce could be another very profitable business for Facebook; the company has integrated its platform with Amazon (NASDAQ: AMZN) and EBay (NASDAQ: EBAY) to a large degree over the last few years, and that sounds like a smart move. Facebook could collect a small fee for transactions done via its platform, and it could also benefit materially via advertising from its relationship with Amazon and EBay. Shopping – especially online shopping – is becoming a social activity, so Facebook has a lot to gain by working together with Amazon and eBay – and smaller players too - in that area.
Bottom Line: Cautious Optimism
Facebook shares are rising for all the right reasons, not just the typical knee jerk reaction we usually see during earnings announcement. The company has made some early progress on the important issue of mobile monetization and is also implementing different initiatives with interesting potential in the middle term. Facebook is not out of the woods yet, but the company is moving in the right direction.
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acardenal owns shares of Google and Amazon. The Motley Fool owns shares of Amazon.com, Facebook, Google, and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, eBay, Facebook, Google, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.