Could 2 New Services Create Billions in Annual Sales?

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In late July, Facebook (NASDAQ: FB) announced plans to utilize video advertising. Then, on August 15, Facebook confirmed to AllThingsD that a payment processing system is in the works. While these two catalysts complement the company’s surprising quarterly beat, and its impressive monetization of mobile, the big question is how fundamentally impactful could these services be?

Making Progress

First, let’s acknowledge the fact that Facebook’s valuation has risen 40% in the last month behind a 53% jump in overall revenue. In its last quarter, Facebook tried to monetize new mobile advertising products, and saw a whopping 75% quarter-over-quarter growth in mobile ad sales.

More importantly, in a market that’s rapidly shifting to mobile, mobile grew to 41% of total ad revenue, which was a major jump from a 28% share in the three months prior.

While sentiment appears to be rising fast, the potential to monetize 1.2 billion users remains robust. Facebook has more traffic than Google, but its $6.1 billion in annual revenue hardly compares to Google’s $55.8 billion. Therefore, the potential to add revenue-generating services could accelerate top-line growth

Enter Video Advertising

Back in July, news hit that Facebook plans to sell 15-second TV-like ads on its site. Initially, it was reported that these ads would run between $1 and $2.5 million per day. It has since been reported that the charge will be closer to $2 million per day; the ads will be gender and age targeted; Facebook could run 4-6 ads per day.

In a previous article, I explained how this strategy could work, and why advertisers would be eager to purchase slots. As an example, I explained that on a typical day Facebook has seven times more visitors than viewers of the Super Bowl. With this logic in mind, it seems as though advertisers would be willing to pay $2 million for an entire day of views, instead of $4 million for a 30 second ad that TV viewers may or may not see (ie Super Bowl).

If we do the math, $2 million per day times four slots equals $8 million a day. Then, multiple $8 million times 365 days and it looks as though this service alone could add $3 billion in annual revenue to Facebook. Depending on its success, Facebook could run 10 ads per day, or up the charge and boost revenue further.

Payment System

The news on August 15 is a little harder to wrap a dollar value behind. Essentially, Facebook will allow users to input their payment information and make purchases on Facebook and third party sites.

In response to this news, eBay (NASDAQ: EBAY) traded lower by 3%, due to their ownership of PayPal. Like I said, it is very hard to gauge potential revenue or success of Facebook’s new payment service. Therefore, PayPal might be a good indication.

During eBay’s last quarter, PayPal contributed $1.6 billion of the company’s $3.87 billion in total revenue. In the quarter, PayPal’s revenue grew 20% year-over-year and its volume rose 24% in the same period. Moreover, the company’s accounts increased by four million to 132 million in the previous quarter.

From this report, I believe there are three takeaways: the electronic payment system is growing fast; it produces significant revenue; and eBay’s 132 million accounts might be similar to Facebook’s conversion of 1.2 billion users. Earlier this year, during eBay’s analyst day, the company projected an annual growth rate of 22% over the next five years for PayPal, guiding for 2015 sales between $9.5 and $10.5 billion.

Personally, I think eBay’s guidance is a good gauge of the possibilities for Facebook. The company has a much greater user base, and while activity may not be as robust at first, I think its use on third party sites is where the upside lies. Moreover, I think this should be viewed as a major concern to eBay, as the company is sure to lose some of its volume due to Facebook’s reach and presence.

While we don’t know how successful this new Facebook payment system will be, I feel fairly confident in saying $3 billion annually isn’t a far reach and should be expected. Even then, Facebook’s system would lag PayPal, but could grow even larger depending on the services that follow.

Final Thoughts

With just two new services, Facebook could create $5 billion in annual revenue in the initial phases. Long-term, Facebook could add more advertising spots, and its payment system could achieve the same $9.5-$10.5 billion in annual revenue that eBay guides for PayPal.

At 14 times sales, Facebook may look expensive, but much like a biotechnology company in the clinical phase, you are investing in the company’s future, and its growth outlook. As an investor, you have to like what you’re seeing with Facebook. The company is growing fast, creating new services, and has the potential to monetize its users on a far higher level. 

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Brian Nichols is long FB. The Motley Fool recommends eBay and Facebook. The Motley Fool owns shares of eBay and Facebook. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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