Where Does Facebook Go Now?

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

For people who have been watching the escapades of Facebook (NASDAQ: FB), one serious question still hangs in the air before they go out and invest in the social networking company. The question pertains to monetization. It’s all good and well that the company is a household name and virtually everyone from teenagers to pensioners have an account on Facebook, but the fact is that if you can’t generate money from such a large database, the market is going to be unforgiving.

This was definitely true when the company got listed in the NYSE in one of the most hyped IPOs of 2012. However, since then Facebook has come a long way in tackling the monetization problem. Mobile revenue was seen as one of the biggest ways to generate money and Facebook was lagging behind peers such as Twitter and LinkedIn (NYSE: LNKD), it was felt. However, the company introduced new products for advertisers such as the Facebook Exchange, which has done extremely well for the social networking giant.

In the past few months since its launch, the Facebook exchange seems to have some impressive stats behind it. The Facebook Exchange essentially works on the principle of re-targeted ads, which are considered a lot more effective than regular advertisements. Allegedly, users were 240% more likely to return to an advertiser’s site after they were re-targeted on Facebook.

Most analysts are of the opinion that these products will drive the company’s revenue up this year. Doug Anmuth said, “We expect continued ad growth acceleration. We do not believe Facebook’s shares are well-owned.”

What else is happening with the company? Something interesting seems to be brewing. A whole bunch of tech journalists have been invited by the company to “come see what we are building” at a press event on Jan. 15. There’s a lot of speculation regarding what exactly it might be. Lots of possibilities have been touted including a smart phone, music sharing space, an e-commerce initiative and a search engine tied to Facebook.

The search engine possibility seems far-fetched considering the fact that Google (NASDAQ: GOOG) is well ahead in this game. The search engine giant has been at the algorithm search space for many years right now and the sheer amount of data that they have indexed is not something that a social networking company can match up to. All Facebook has is data regarding people’s whereabouts and their interests, but Google has indexed pretty much the entire web. Google is the proverbial 800 pound gorilla of the internet and it would be madness if Mark Zuckerberg thought that he could take them on at their game.

However, there is something interesting to note in this world of smart phone computing – something Google isn’t immune from when it comes to search. There’s an interesting piece in The Guardian (slightly dated) which I urge you to read if you have any sort of position on Google. The Mountain View based company generates a lot of revenue through cost per click advertising. The company doesn’t make as much from a cost-per-click scheme on mobile as it does on desktops. The second thing is the permeation of apps. As the article points out, most people use apps to find things nowadays. To use the same example mentioned, if you want a list on train times, you download an app for it. And the data from these apps cannot be indexed by Google, therefore reducing the size of its searchable database.

Still, I don’t think Facebook is capable of taking Google on in that space. Whatever it is the Zuckerberg led company has planned for Jan. 15, we will find out in a couple of days. Nonetheless, one fact cannot be denied, which is that Facebook seems to have gotten to grips with rectifying the monetizing conundrum.

The company seems to be fairly highly valued with a P/E ratio of 164, but this is a fairly normal valuation for social networking companies apparently when you consider that LinkedIn has a P/E ratio of close to 700! The funny thing is that Facebook has a larger user base, which will go further when seeking ad revenue. The professional networking site only recently crossed 200 million users while Facebook claims to have nearly 800 million users. LinkedIn has different sources of revenue such as an employment platform and a premium membership scheme. However, it is the employment platform that makes the most money and they are most likely going to face stiff competition from the likes of Salesforce and TweetMyJobs.

The valuation for Facebook not being as high as that of LinkedIn makes it a lot more positive buy when you compare the two. And as a stand-alone investment, I believe that there is potential for the company to keep going. I wouldn’t advise you to bet your house on it, but a fairly small percentage in your portfolio can be allocated for Facebook and it wouldn’t be too much of a risk, in my opinion. For all you know, you may have just invested in the next Amazon!

keshavr has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and LinkedIn. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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