Which Advertisement Giant Will Win in Mobile?
Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Internet ads represent one of the fastest-growing industries in the entire technology sector. The business has changed radically in the last few years, showing average revenue growth of around 15%. This fast growth is due to the increased usage of handheld devices. As users spend more time online with their smartphones and tablets, leading online advertisers Facebook (NASDAQ: FB), Google (NASDAQ: GOOG) and Yahoo! (NASDAQ: YHOO) must now find new ways convert this handheld audience into revenues.
You can glimpse of how well each company's doing at attracting mobile users through their quarterly numbers. When Facebook reported its earnings last week, Wall Street focused on the effectiveness of its mobile advertising. The market was expecting Facebook to continue its strong earnings record by reporting $0.13 per share in net income, on revenues of $1.44 billion.
Facebook didn't entirely beat that prediction, but it did roughly meet it, with EPS of $0.12 and a surprising $1.46 billion in revenue -- a phenomenal 38% top-line increase year over year, thanks to continued improvements in mobile monetization.
In the last few months, Facebook has introduced a number of new mobile advertisement products. A recent report discusses Facebook's attempts to develop new products by leveraging consumer preference data from partners, which lets the company deliver more targeted and focused advertisements. Its mobile revenue grew to $375 million in the first three months of this year, and it now accounts for nearly 30% of Facebook’s total revenues -- up from its 23% contribution in the prior-year quarter.
The mobile advertisement arena is becoming increasingly competitive. Yahoo! and Facebook rely primarily on display ads, while Google’s main strength is its search revenue. Google has also developed the world’s most widely used mobile OS, Android, which gives the search giant a long term edge when it comes to mobile monetization.
The game-changer in this space has been Google's YouTube, which is showing an annual revenue run rate of $5 billion, according to the company's most recent quarterly report. YouTube gives Google a natural platform to branch out from text-based, search-driven ads to more luctrative display ads.
Meanwhile, Yahoo! is also trying to turn around its falling revenue trajectory by overhauling its entire homepage and focusing on generating more engaging content. New CEO Marissa Mayer has led an effective overhaul of the company, resulting in 66% appreciation of the stock in the last year alone. In its recent earnings report, the company managed to beat earnings estimates, but came slightly behind on revenues.
Google may have surpassed Yahoo! in display ads, but Yahoo! is headed in the right direction and will challenge this dominance. At a forward P/E of 16, Yahoo! is the best bargain in this space, especially if we account for the value of its investments in Chinese search site AliBaba.
Mobile monetization is the key to future growth of leading players in this industry. Facebook has shown investors its true mobile potential by churning out a stellar quarter. The company also has the ability to improve its online video services and seriously challenge YouTube's display revenues.
Facebook is currently trading at a forward P/E of 32, and 15% below its mean sell-side target price. The company has a 5-year average revenue growth of 100%, which demands further multiple expansion and an increase in share price. The discussion shows that Facebook is the best long-term investment in the internet advertisement industry, and a long-term buy.
Mohsin Saeed 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!