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Sean is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Facebook will be the golden boy of 2013.
For about four months after its IPO Facebook (NASDAQ: FB) looked like one of the dumbest investment decisions of 2012. The stock went from an IPO price of $38 to under $18 a share. Since about September Facebook has been happily bullish and has climbed to about $28 per share. It is poised to continue that growth in 2013.
Facebook will be one of the great investments of 2013. The key to its revenue and profitability growth (and ultimately stock growth) rests entirely on its ability to expand its advertising platform, something that it has begun to do over the last couple months and will continue to expand over the course of this year.
Facebook is diversifying its advertising platform in multiple ways. A few months ago it launched Facebook Exchange, which lets users bid on ads based on a user’s browsing history. Another new feature lets mobile-application developers pay for ads that advertise their own applications.
Another new revenue feature is Facebook gifting. This allows someone to buy a gift for a friend through Facebook for a special occasion or event; the friend is then notified that a gift has been purchased for him, and he can change the color, size, or flavor and put in his address.
These gifts come from a number of different retailers including Gap (NYSE: GPS). If this gift concept really takes off this would end up being a great partnership between companies like Gap and Facebook. Facebook is handing Gap a whole new way to market itself and Gap gives Facebook an additional revenue stream.
Facebook gifting is expected to add about $100 million dollars in additional revenue over the course of 2013.
The real growth potential however is in the mobile ad market. This is what will really spur Facebook’s growth over the next year.
Facebook currently utilizes sponsored stories. Sponsored stories show up in a user’s news feed as ads that don’t quite look like ads. In 2011, Facebook was nonexistent in the mobile ad sphere and Google (NASDAQ: GOOG) held over 23% of the market. In 2012 that changed dramatically as Facebook launched its mobile ad platform and sponsored stories.
By the end of 2012, Facebook had over 18% of the market and Google was down to 17%.
Facebook’s rapid domination of the mobile ad market will only become more hegemonic in 2013. It is expected to capture over 25% market share this year. Having made over $300 million from mobile ads in 2012, Facebook will catapult forward in 2013 thanks to a growing market share and a growing mobile ad market in general.
There are a couple dangers facing Facebook. The biggest of course is the growing popularity of Google+. Google recognizes the importance of social networking for targeted advertisements. Not wanting Facebook to be too dominant in the social networking sphere, Google has been pushing its own Google+ network. Many Google applications now require a Google+ account in order to use them.
Google then takes this account and ties it to your activities around the web, often unbeknownst to you. A recent Wall Street Journal article highlighted how a Navy officer signed up for Google+ in order to store photos online and then realized that his account was tied to a review he had written in the Google Play store. This knowledge about people is what Google values and is hoping to leverage to compete with Facebook.
But Facebook has nothing to worry about from Google+. The fact that Google is resorting to forcing people to use its network is an indication that people are not that interested in it. Facebook doesn’t need to try and force people to use its network. The brand loyalty and engagement will be much higher with Facebook than Google+ as a result of the lack of coercion. With higher loyalty and engagement will come more usage which will lead to more revenue both online and on mobile.
Another danger is that Facebook is losing games. Games create another reason for people to come back to Facebook regularly and spend more time on the site. Some of the big name game publishers such as Zynga (NASDAQ: ZNGA) and Electronic Arts (NASDAQ: EA) are shutting down a number of their games on Facebook. This could be a problem for Facebook if it detracts from the user experience and cuts down on the time people spend on the site.
The companies are, in general, shutting down their least popular games to focus on their more popular games. But some of these games do have a significant user base. PetVille, one of the games Zynga is shutting down, gets one million visitors per month. Electronic Arts just shut down its PGA Tour Golf Challenge game.
While it might irk a few loyal fans, I don’t think this will be a problem overall. I think the Facebook clientèle will simply shift to other games or they will find other ways to spend a comparable amount of time on the site.
Facebook has set itself up to grow dramatically in 2013. It has new revenue streams that have shown strong potential and the growing mobile market is something Facebook will begin to dominate more and more as the year goes on. It is a solid company with good growth potential and definitely worth owning.
SeanMSullivan has no position in any stocks mentioned. 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!