Will Auto-Play Ads Ruin Facebook?
Tyler is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Even with the stock suffering in 2012, Facebook (NASDAQ: FB) just passed the one billion user mark. Yes, one in seven people worldwide use the social media sight. The company has been critiqued heavily in recent months for its lousy IPO, privacy issues, and miscellaneous lawsuits. Why on earth would the company release news that states the desire to add the dreaded auto-play video ads to its site?
When asked if they could incorporate auto-play without distracting users, Facebook CMO David Fischer said, "I believe there are ways we could do it. There are ways that could be destructive and distracting to the user experience. But there are ways that could potentially balance user experience with advertiser experience. We haven’t put a product out yet because we haven’t had one we’re comfortable with. But if we could, then we would do it." I can only think of one way that wouldn't frustrate and distract users - don't have them. But who am I?
The company certainly has a market for advertisements with over 680 million mobile users, 42 million pages, and 9 million apps. Facebook has a market cap of nearly $67.5 billion, and a FCF yield of .6%. Although value investors may not like that valuation, they would probably cringe knowing the companies P/E is 1,917.4. The good news is their Forward P/E of 39.4. In 2012 revenues were well over $5 billion with a gross profit of nearly $4 billion or 73.2%.
Facebook did credit Google (NASDAQ: GOOG) with the way they incorporated auto-play on YouTube. YouTube allows more control to the viewers by only mandating the first five seconds of an ad to be watched. After the five seconds, you can skip the commercial. Facebook has tossed this idea around, as well as limiting commercials to only 15 seconds as opposed to 30 seconds. The average Facebook user is logged on for 6.5 hours/month, so if Facebook played commercials as frequently as the ones we see on TV, they could play 400 commercials per user per month.
It appears Facebook needs to generate more income as their Earnings Per Share (EPS) is only $.01 compared to Google's of $32.47. YouTube has 800 million users and 4 billion plays every day, yet only accounts for slightly more than 5% of Google's revenue. Aside from YouTube, Google + has 343 million active users. Google's shareholders should be very happy with the performance the stock has shown in the past year (increasing 32%). This is quite different from Facebook's 26% loss. Google's P/E is approximately 24.4, with an institutional ownership 46% higher than Facebook's. With over $50 billion in 2012 revenues, Google shows a far better FCF yield of 5.1%.
If Facebook does incorporate auto-play videos and users become frustrated, Facebook will not be the only company affected. Zynga (NASDAQ: ZNGA) currently shows that 80% of its revenues come from Facebook users. This may not be true for long, as its relationship with Facebook is scheduled to end on March 31. Zynga games currently has over 265 million monthly users, and has grown since its IPO in December of 2011. The stock, on the other hand, has fallen over 55% in the past year, and now shows a FCF yield of -1.6%. With an institutional ownership of 30% and a market cap smaller than both Facebook or Google (approximately $2.5 billion), this company appears to be far more risky. The company does show a Forward P/E of 47.8.
The Foolish Bottom Line...
I don't see how much good can come from Facebook wanting to use auto-play commercials on their site. Maybe I'm wrong, but I think users would become very frustrated and distracted by the commercials leading to a decreased number of users. Zynga appears to be struggling, although its stock can't fall much as it’s already barely over $3/share. Google seems to give the best value, growth, and overall performance of any of these companies despite its use of auto-play. Google has almost become a necessity for people, unlike Facebook. It will be interesting to see what Facebook decides to do, and how they will incorporate auto-play if the decide to go in that direction.
tlwofford 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!