Facebook Ramping up Mobile Monetization

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After a rocky start following its IPO, Facebook (NASDAQ: FB) seems to have regained its footing. Despite an enormous valuation, bullish investors continue to send the stock higher. The latest catalyst was an excellent earnings report, which beat on both the top and the bottom line. These results sent the stock soaring over 25% on Thursday. Of particular interest to investors was the company’s ability to increase its mobile ad revenue, which was seen as a problematic area by many. Now, it seems as if Facebook has managed to capitalize on this growing market.

Big Beat

Facebook really hit it out of the park for its FQ2 2013 report. EPS came in at $0.19, well above the $0.14 consensus and up from $0.12 in the same period a year ago. Revenue surged 53% to $1.81 billion, also smoking analyst estimates of $1.62 billion. The operating margin increased about a percentage point compared to the same period a year ago, now up to 44%.

Another important gauge of Facebook’s popularity, daily active users increased by 27% to 699 million, whereas monthly active users increased by 21% to 1.15 billion. These are some formidable numbers, but what had analysts particularly pleased was the surge in monthly active mobile users. This figure increased a huge 51% to 819 million.

Not only the number of mobile users increased, but also the portion of revenue derived from this avenue. Mobile ads now account for 41% of advertising revenue, up from 30% in the last quarter. For many, this is evidence that Facebook has effectively managed to capitalize on the mobile advertising market. As a result, analyst upgrades have been streaming in, and price targets have been soaring. In any case, Facebook seems to be growing revenue a lot faster than the competition in this market.

Peer Mobile Monetization

Last week, Facebook’s rival Google (NASDAQ: GOOG) came out with some fairly disappointing numbers, missing on revenue and whiffing on EPS. Earnings for the quarter came in at $9.56, well under the $10.78 consensus. Particularly worrying to investors was the company’s struggle with monetizing mobile ads. As mobile ads are a lot less expensive than traditional advertising, the shift to mobile devices has seen Google’s cost-per-click decline 6% year-over-year. While still the biggest name in mobile advertising, with over 50% of the market share, Google is putting a lot of work into enhancing revenue from mobile.

Yahoo! (NASDAQ: YHOO) is another company that relies on advertising for a sizable portion of its revenue, and this company too has been struggling with mobile monetization. While the company beat convincingly on earnings, revenue showed a 7% decline as competitors are increasingly eating up Yahoo!’s advertising market share, especially in mobile. As a result, the company has been investing heavily in advertising acquisitions, recently picking up mobile advertising startup Admovate. CEO Marissa Mayer has reaffirmed her commitment to growing in mobile, but it remains to be seen how well Yahoo! manages to capitalize on this segment.

Valuations and Metrics

Facebook is a horrendously expensive stock at the moment, looking at current valuations. It trades at 724 times trailing earnings, and at 11.68 to sales. The forward P/E is a little more reasonable at 42.72, but still quite high. The return on equity is surprisingly low at only 0.77. The company has plenty of cash on the books, and relatively little debt. The stock’s sky-high valuation doesn’t seem to scare off bullish investors, but I personally am rather cautious.

The Bottom Line

There is no doubt that Facebook had an excellent quarter. The company not only beat on EPS and revenue, but also showed that its efforts to increase mobile ad monetization are paying off. In fact, the company seems to be doing a lot better than the competition in growing its mobile ad revenue. While the stock still looks somewhat overpriced, the optimism surrounding the company may fuel a continued rally. 

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Daniel James has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Yahoo!. The Motley Fool owns shares of Facebook and Google. 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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