Why Facebook Will Keep Making Money

By Jon Friedman | September 02, 2014 AAA

What “Facebook Fatigue?”

Facebook is determined to remain relevant on all platforms and go beyond its reputation as the king of social media. With the acquisition of Oculus VR, which makes the Oculus Rift virtual-reality headset, for $2 billion in stock and cash, the company is demonstrating its desire and ability to re-invent itself and reach multiple technology platforms. It is a wise strategy, since the tech business changes seemingly on a daily basis. Today's flavor of the month may go out of favor by next month.

Facebook is working off a solid foundation. While skeptics suggest that Facebook’s growth will be short-lived,  in the fourth quarter of 2013, Facebook reported earnings per share of 31 cents, blasting through Wall Street’s expectations of 27 cents a share. Its stock is up fourfold since hitting a post-IPO low, too. You might say the social-media pioneer is firing on all cylinders these days.

For Facebook Inc. (Nasdaq:FB), the key to success can be summed up in its ability to appeal to advertising-friendly users in many ways. It acquired Instagram and then What'sApp and now Oculus, underscoring its financial clout and strategy of succeeding on various platforms.

Bundle Inventory

“Facebook is able to bundle inventory which appears on mobile and non-mobile devices,” said Brian Wieser of the Pivotal Research Group. Facebook’s ability to bundle its ads across mobile and desktop platforms has had the effect of “rendering the distinction as mostly moot," Wieser said.

Mark Zuckerberg’s company, which recently celebrated its tenth anniversary, is a mobile juggernaut, too, fitting the fact that "mobile" is currently the magic word both in Silicon Valley and on Wall Street..

Forget the tired tags involving “social media.” The social-media explosion of the 21st century may be the linchpin to explain how Facebook amassed amind-boggling 1.2 billion users in its initial decade.  But Facebook continues to exceed Wall Street’s expectations because of its prowess in the mobile advertising market and its promise to succeed on each new platform that comes along.

In the fourth quarter of 2013, Facebook's mobile ad revenue drove the gains, with mobile ad sales jumping to 53% of the company’s revenues, up from 49% in the third quarter before as Chief Operatng Officer Sheryl Sandberg told Wall Street analysts during a conference call to discuss the company’s fourth-quarter results.

As further evidence of a milestone, this progress signified the company’s first $1-billion-plus mobile-advertising revenue quarter in its history.

Mobile Powers Stock

Facebook’s success in the mobile arena has powered the rise of its stock price. Remember just after the company staged its ballyhooed initial public offering on May 18, 2012, amid great expectations as shareholders had visions of yachts and early retirements dancing through their heads? The stock plunged 53% from the IPO price of $38 to an all-time closing low of $17.73 on Sept. 4, 2012.

During that gloomy period, one of Facebook’s major negatives on Wall Street was its inability to convince the big stock pickers that the company possessed a sound, forward-thinking mobile strategy.

Facebook went about conquering the mobile market by creating one app at a time, as the company attempted to answer its users’ demands to connect with one another on mobile platforms. But Facebook understands that it cannot focus on mobile at the exclusion of other, reliable markets. When Zuckerberg conferred with Wall Street analysts during the fourth-quarter earnings conference call, he pointed out: “One theme that should be clear from our work on products like Messenger, Groups and Instagram is that our vision for Facebook is to create a set of products that help you share any kind of content you want.”

Facebook has hardly stood still since that Zuckerberg proclamation, either. It acquired WhatsApp for a hefty $19 billion. As Forbes noted, WhatsApp now handles nearly as many messages as the whole telecom ecosystem. It commands 450 million users with 70% of them active on a daily basis. Facebook's daily user base is only slight bigger, at 550 million.

The WhatsApp acquisition was controversial because it a) took Wall Street by surprise and b) carried what initially seemed like a gargantuan price for a company with a mere 55 employees and $300 million in revenue.

But the takeaway from the deal could well transcend the baying of the naysayers today. It underscored Facebook’s determination not to become irrelevant and go the way of MySpace, Friendster and other shooting stars in the tech universe.

The Bottom Line

Ultimately, Facebook is upgrading its mobile business because this is where the action is in 2014. Should mobile’s allure show signs of fading or if another communications device suddenly supersedes it, watch Zuckerberg & Co. move aggressively to put Facebook’s stamp on it, too.

Disclosure: The author does not hold shares of Facebook.

 

 

 

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