Are Mobil Ads the Answer for Facebook?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's been quite the roller coaster few weeks for social network giant Facebook (NASDAQ: FB). The hopes of CEO Mark Zuckerberg were brought back down to Earth after an IPO that had more in the way of hype than actual value for investors. But a company like Facebook is in somewhat uncharted territory for investors, and things are looking much better for Facebook now than just a few weeks ago. Currently, the stock is trading at around $33, up from a low of $25.52 just weeks ago. Now that the (over)hype has subsided, I am cautiously optimistic about the future of Facebook. Thanks to good news on the advertising front, as well as new developments and acquisitions, Facebook just might be headed in the right direction for the near future.
The biggest reason I feel good about Facebook right now isn't just the fact that its stock has quietly made a nice recovery from its infamous IPO disaster. While it has certainly done so, I'm more excited about recent news about Facebook's mobile ads. For me, monetizing its user base was by far the biggest issue I saw with Facebook. Many were skeptical about how much money could be made with Facebook advertising in the first place, but since Facebook users are increasingly becoming mobile-only users, the problem is compounded. This is because, up until now, there was little confidence in Facebook being able to translate advertising into mobile versions, where there currently is none. But new data suggests that problem just might go away. Facebook has developed ads in the format of "Sponsored Stories," and they are being clicked on 13 times more often than its traditional desktop ads. This is pretty astonishing, considering the original worry was that mobile ads wouldn't work at all, let alone be 13 times more effective. Even better for investors, the ads could earn 11 times more money for the social network kingpin.
While Google (NASDAQ: GOOG) has continually dwarfed Facebook in ad clicks, Sponsored Stories could change everything. If these ads are as effective as the data is saying, this could be a game changer not only for Facebook, but for tech companies in general. Chris McCann, CEO of 1-800-FLOWERS (FLWS), told Business Insider his company was one of the companies used in the test run. While he did not provide details, he called the results "very promising." Spectacular news for a stock that just weeks ago was being widely panned for being overhyped. While it certainly was overhyped, the media deserves more blame than anyone. The IPO disaster was certainly a shot in the arm for Facebook, but it could be soon forgotten. Furthermore, the company has rebounded from the loss of General Motor's (GM) advertising by scoring deals with both Ford (F) and Coca-Cola Bottling (COKE). The fact that these titanic companies have confidence in the efficacy of Facebook's advertising is yet another sign that concerns about the ability to bring in enough ad revenue were overblown.
As I mentioned earlier, Facebook's stock has made quite the recovery. One of the potential reasons for this is hype surrounding its first sales and earnings report, which is slated to be released in July. In an interview with Yahoo! Finance, analyst David Garrity was optimistic about what the report will show.
"They should be able to pull some stops and put up a fairly decent number when they come out and release results in July," Garrity said. "We can expect to see a wave of positive recommendations coming out of [analysts]."
Another reason to be optimistic about Facebook is that it isn't standing pat, recently acquiring facial recognition software company Face.com. While details of what the company has planned are not known, it is likely Facebook's photo "tagging" system will be improved. This, combined with the recent Instagram deal, positions Facebook to be quite formidable with regards to photos, which are such an integral part to the social network experience. Another good move recently made by the company was the decision to give application developers the ability to charge subscription fees. Now, third-party companies will be able to get monthly fees out of their apps' users. Also, Facebook is getting rid of its weird "Facebook credits" in favor of pricing items in whatever currency used by the user in that market. This is the way Google and Apple (NASDAQ: AAPL) have been doing things for years, to great success. While Facebook obviously pales in revenue to tech mainstays Google, Apple and Microsoft (MSFT), who knows how high the ceiling is? As far as its most direct competitors go, privately held Twitter is facing many of the same advertising questions as Facebook. And professional social network LinkedIn (LNKD) was just hit with a class-action lawsuit after a breach left many people with unprotected passwords. So if you feel strongly about the future of social networking at all, the current climate suggests you're best bet is to go with Facebook.
Facebook is not going to take over Google anytime soon. Social networks are still in their infancy, and anyone that thinks Facebook is going to shoot to the moon after the recent news needs to pump the brakes a little bit. Admittedly, the IPO was an unmitigated disaster. But I feel far, far better about the prospects of Facebook now than I did a few weeks ago. If the mobile ads are anywhere near as successful as the data claims they are, investors who get in now could be in for a tidy profit. That, combined with the other moves it has made recently, leads me to be quite optimistic about the future value of the company, and I would cautiously recommend now as the time to buy.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, and Google. Motley Fool newsletter services recommend Apple 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.If you have questions about this post or the Fool’s blog network, click here for information.