Facebook: Moving from Hype to Hyper-Growth

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

In an article two months ago, I talked about why it was time for investors to stop hating Facebook (NASDAQ: FB) and instead look in the mirror. The premise was simply this: Facebook was over-hyped, this much is known. Likewise, its IPO was grossly mismanaged and was a huge catastrophe. The world cried over it, but it was then time to move on. More importantly, it was time for investors to start appreciating the growth powerhouse that Facebook could truly become. Its most recent quarter showed glimpses of this potential. But would investors catch on?

A solid Q3 that silenced the bears

The first thing I took away from the results of the quarter was that the company beat on both the top and bottom lines. What this also means is that with now two full quarters under its belt as a public issue, Facebook is batting 1.000 (a thousand) with analysts. Nonetheless, as with every quarterly report, it’s often based on interpretation and relative to expectations. In other words, what did the company really prove?

Facebook reported $0.12 per share on revenues of $1.26 billion, exceeding consensus estimates of $1.22 billion and $0.11 per share. The company’s better than expected performance was helped by significant improvements in various segments of its business, many of which continue to grow by double-digit averages, one example being payment revenue, which soared 13% year-over-year to $176 million.

Likewise, the company produced $1.09 billion in advertising revenue. But the impressive aspect of this was that 14% of that total (or $152.6 million) was generated from mobile. This was certainly an encouraging sign for investors since Facebook’s biggest form of criticism has been its inability to monetize mobile traffic. During the quarter, it answered the call.

What this means is that the company is transitioning successfully from a predominantly desktop dependant platform to a mobile company. But are advertisers convinced enough of this transformation to commit more of their ad dollars to the smaller devices? This is where Facebook’s challenge comes in – and at one point this was pretty daunting. Not so much now.

Growing ads, growing mobile

At one point, Google (NASDAQ: GOOG) was said to be eating Facebook’s lunch where it matters the most – with advertisers. In May, a report was released by Wordstream that measured the “click through rate” (or CTR) between the two rivals; the report concluded that Facebook had less reach than Google and therefore its ads were less effective. If you recall, this was the same period during which General Motors ended its advertising relationship with the Facebook (although GM has since returned).

What the report indicated in May was that Advertisers were paying more per click on Facebook than they were on Google. However, this quarter the report showed a reversal as Facebook’s CTR has increased, which means that advertisers now pay a lower rate per click. On a similar note, it seems that Facebook’s sponsored stories have helped the company gain more overall traction with advertisers, as evident by the 32% year-over-year growth in ad revenue.

That the company was also able to improve ad revenue by 7% sequentially means that its new mobile strategy is working. And the company is doing what it needs to do to address a key growth area. Essentially, advertisers are (at least) now being more receptive to the idea that they can get a good return on their investments. Meanwhile, Facebook has bought itself more time to get this transition completely right.

Bottom Line

Facebook is now performing as well as it can. Although the company is certainly not out of the woods just yet, evidence suggests that it’s at least moving in the right direction. The company is talking less and executing more, which is a good sign of maturity. But Facebook is anything but mature. For its current investors, that’s a good thing. After all, the company is still trying to overcome growing pains.

Interestingly, it would seem that Facebook has attracted a lot of new friends. This would seem true from its recent stock performance, which has risen 60% since September. It’s hard to imagine that the shares can have more room to run after such an incredible performance. But on the other hand, now would not be a good time to start doubting Facebook’s ability – not when it seems it has mobile figured out.

rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, General Motors Company, 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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