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Status Update: It's Time to 'Like' Facebook

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

Let's take a foolish look back at 2012.

The first half of the year was dominated by the hype of a single IPO - Facebook (NASDAQ: FB). The second half of the year was spent lamenting our losses from the bombed IPO, which dropped to less than $18 per share in September.

Despite my previous experience in the markets, I also bought Facebook's IPO. I secured some IPO shares at $38, and giddily anticipated a LinkedIn style rally on its first trading day. 

Well, things didn't quite pan out. Like many other burned investors, I spent a lot of last year 'hating' Facebook.

<img src="http://media.ycharts.com/charts/4902809a78181a09abf9510840b2c7bc.png" />

FB data by YCharts

I then remembered an old investing mantra: "'Look forward, not backward, when investing."

When I looked forward into Facebook's future, rather than at its tumultuous past, something unprecedented happened - I actually 'liked' what I saw.

Looking Forward

Facebook reported its third quarter earnings last October. The skies cleared as CEO Mark Zuckerberg answered the billion dollar question of mobile growth - how to monetize mobile advertisements!

Let’s take a look at Facebook’s third quarter ad revenue, along with the average analyst projection for its fourth quarter earnings, which will be reported on January 30.

<table> <tbody> <tr> <td><strong>Facebook Quarter</strong></td> <td><strong>Total Ad Revenue</strong></td> <td><strong>Total Ad % of Total  Revenue</strong></td> <td><strong>3Q Mobile Advertising Revenue</strong></td> <td><strong>Mobile Advertising % of Total Revenue</strong></td> </tr> <tr> <td><strong>3Q 2012</strong></td> <td>$1.1 billion</td> <td>86%</td> <td>$150 million</td> <td>14%</td> </tr> <tr> <td><strong>4Q 2012 (estimated)</strong></td> <td>$1.5 billion</td> <td>80%</td> <td>$300 million</td> <td>20%</td> </tr> </tbody> </table>

Why is the growth in mobile advertising revenue so significant for Facebook? Two simple facts:

  • $0.81 per click on desktop platforms
  • $1.38 per click on mobile platforms

That's a 70% premium for mobile clicks!

Note that the estimate for fourth quarter growth from 14% to 20% in mobile advertising revenue is a conservative one, based on JPMorgan analyst Scott Devitt’s projections. However, Topeka Capital’s Ken Sena is more optimistic, believing the number could come in as high as 24%. JPMorgan’s Doug Anmuth even believes that mobile advertising revenue will overtake desktop revenue by 2014, making Facebook more streamlined for mobile revenue than Google, which is projected to earn 21% of its total ad revenue from mobile ads by 2014.

A recent report also showed that Samsung Mobile generated approximately $129 million in sales last quarter from a $10 million investment in Facebook advertisements. That impressive 12.9 ROI from the world’s largest smartphone maker is likely to make more than a few big companies consider using Facebook as their main advertising platform.

Facebook vs. Google

I’m only comparing percentages here, not overall mobile revenue. On that basis, Google (NASDAQ: GOOG) is still the undisputed king with $8 billion vs. Facebook’s $150 million in the third quarter. However, Facebook’s approach to dominating the Internet is radically different from Google’s, and these differences make Facebook’s advertising platform more appealing in the long run.

Let’s take a look at how Facebook and Google create “targeted ads”. On Facebook, these ads pop up in the margins, and occasionally within your news feed. On Google, they appear on websites participating in the Google Ad Sense program. Both company’s ads attempt to gauge user interests through accumulated data.

Facebook Targeted Ads:

  • Gathers the following information from your profile: age, location, education, relationship status, favorite movies, music, and other interests.
  • Gives advertisers the power to set custom filters to reach their targeted demographic.
  • Uses Facebook Connect in lieu of a login system for participating sites, providing Facebook with data from commonly visited sites and viewed stories.
  • The newly unveiled Graph Search allows users and advertisers to search its entire user base based on similar interests - and could be a useful wild card against Yelp, LinkedIn and Google. 

Google Targeted Ads:

  • Google’s ad scans the content of the page it’s embedded in to find the topic, and chooses to display a related advertisement.
  • Batch orders of placement ads, that are featured throughout an entire structure but not necessarily related to the individual page content.
  • Keeps tabs on the Internet history of individual users, through cookies and Google accounts, and attempts to launch an appropriate advertisement.

While both companies’ strategies raise some privacy concerns, Facebook’s method is more invasive and mines more information. Yet that’s what make’s Facebook’s advertisements more effective and attractive to advertisers.

Advertisers can also just add a friendly fan or business page, urge users to “Like” them, and they get a free pass to post advertisements in the users’ news feed. Google has been attempting to emulate this style in Google+, but the underdog social networking site’s 135 million users still distantly trails Facebook’s 1 billion.

Analysts have also touted the potential of Facebook’s ad-exchange system and News Feed ads. JPMorgan’s Doug Anmuth stated, “Marketer feedback on mobile and news feed ads has been very positive.” Anmuth, who gives Facebook a price target of $35, forecasts that News Feed ads alone will generate 60% of the company’s fourth quarter revenues.

Facebook ‘Unfriends’ Zynga, and Buys Some Gifts

Last November, Facebook parted ways with social game maker Zynga (NASDAQ: ZNGA), denying its former partner direct access to its users’ News Feeds, instead requiring players to make game requests by e-mail. In exchange, Facebook allowed Zynga to create games outside Facebook on external sites. Analysts had been concerned regarding Facebook's dependence on Zynga for revenue, since it generated 14% of its top line in the first half of 2012.

The company’s new gift-giving ‘Facebook Gifts’ platform has been considered a possible replacement. The platform allows users to purchase physical gifts for each over the social network. Facebook earns a 12% commission from each purchase, in line with the percentage retained by Amazon.com. Topeka Capital’s Sena believes that Gifts could generate nearly 5% of the company’s top line by the end of fiscal 2013.

This new bright spot, combined with rising mobile revenue growth, could easily offset any risks and losses at its social games division.

The Foolish Bottom Line

Facebook is evolving into a strong contender in Internet display advertising, although it still has a ways to go to justify its trailing P/E of 160. But investors should consider the company’s revolutionary way of gathering data and creating targeted advertisements, and what it truly means for the future of Facebook.

Leo Sun owns shares of Facebook. The Motley Fool recommends Facebook and Google. 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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