Bull Vs. Bear - Facebook's Mobile Ads Will Increase Its Stock Price

By Will Ashworth | September 28, 2012 AAA

Question: Will Facebook's new plan for ads help push up its stock price?

Bull's Response
Digital marketing expert eMarketer predicts that Google (Nasdaq:GOOG) will overtake Facebook (Nasdaq:FB) in display ads in 2012, collecting 15.4% of all display ad dollars, compared to 14.4% for Facebook. As a result, Google will lead in all three digital ad categories - search, mobile and display. That can't be good news for Facebook, although its new plan for mobile ads, along with other revenue-generating ideas, should help push its stock price up. It's only a matter of time.

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Barron's published an article Saturday, September 22, that suggested Facebook's stock is worth $15 a share. Then Appcelerator, the creator of a platform for developing mobile apps, came out with a survey of 5,500 mobile developers that found 66% of them believe Facebook will be upended at some point in the future by a mobile-first social media startup. The two pieces of information caused Facebook's stock to drop 9% to $20.79 by the close of trading on September 24.

Some media hack, albeit a fairly seasoned one, says the shares are worth $15 and investors are supposed to jump off the proverbial bridge. Professor Aswath Damodaran, one of the finest valuation experts anywhere, believes its intrinsic value is $24. Who's right? As for the report by Appcelerator, it's purely self-interest on the part of the company and the 5,500 mobile developers it surveyed to suggest a mobile-first start-up will overtake Facebook. What else are they going to say when mobile pays the freight? Investors truly are irrational sometimes.
It's interesting that I'm writing a bullish commentary on Facebook because I rarely use the site, preferring LinkedIn (NYSE:LNKD) as my social media drug of choice. Like any relatively new organization, it takes time to find your groove. Amazon.com (Nasdaq:AMZN) was started in July 1995 and didn't make its first annual profit until 2003. Google began in 1997 and took five years to make its first annual profit, and Facebook got its start in February 2004 and made its first annual profit in 2009.

When Google went public in 2004, its annual operating profit was $342.5 million on $1.47 billion in revenue for an operating margin of 23.3%. Meanwhile, eight years later, Facebook went public with an operating profit of $1.76 billion on revenue of $3.71 billion for an operating margin of 47.4%. Facebook is miles ahead of Google at the same point on the development curve and yet Facebook's stock is facing an absolute ravaging by media and analysts alike. It's hard to remember what was said about Google back in 2004, but I'm pretty sure it wasn't as negative.

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Facebook's plans for mobile along with its missteps were part of Mark Zuckerberg's interview on September 12 with former TechCrunch editor Michael Arrington. What is most interesting to me was his statement that Facebook didn't run a single mobile ad at the time of its IPO, yet mobile ads will represent 2% of its revenue in 2012 and by 2014, could be as high as $629 million. According to comScore, Facebook users spend 441 minutes on average each month on Facebook Mobile.

Now consider that there are approximately five billion people with cellphones worldwide. With a mobile business barely off the ground, the potential growth is mind boggling. It's at this point in the interview that Zuckerberg admitted Facebook's biggest mistake as a company was betting too heavily on HTML 5 when the quality was, and still is, less than perfect. It wasted two years on programming for something that it's had to step back from. That would kill most companies, but Facebook's taken it in stride, treating the experience as a lesson on decision-making.

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TBG Digital, an advertising agency focused on Facebook, suggests its Sponsored Story ads provide a click-through rate that is 14 times higher its traditional ads on the right sidebar. In addition, they deliver a much better return on investment. For those of you unfamiliar with Sponsored Story ads, they are the ads that appear in your news feed, whether it be on your mobile device or desktop.

They've become so popular that Facebook is generating $1 million a day in revenue from the ads. Most importantly, the format is so engaging that companies are able to lower their cost of acquiring Facebook fans, while Facebook is able to generate greater profits per ad. It's a win/win situation. Unfortunately, Facebook has limitations on mobile ad availability, which in the short-term will have a detrimental effect on ad revenues. Over the long-term, with the movement toward mobile, Facebook will surely figure out how to maintain the customer experience while running more ads. With so much advertising failing to register these days, the Sponsored Stories appear to be a real winner.

The Bottom Line
In the interview with Mark Zuckerberg, he was asked about the stock causing morale problems. The Facebook CEO replied that a lower stock price was actually a good thing for its employees because it translates some of their cash compensation into shares. So, if the share price drops by $10, the employees are given more shares. A form of dollar-cost averaging if you will. Ultimately, as long as the shares don't go to zero, the employees will do just fine.

As you can probably tell by this article, I'm not the most technologically-savvy individual. I barely know the difference between HTML and native. But what I do know is that Facebook's mission to create great products and services doesn't interfere with its ability to make money. In the coming years its mobile ads will be just one part of a very large and profitable social enterprise. I'm very bullish on its future and eventually that future will be reflected in its stock price.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Don't forget to read the Bear Side of this debate and weigh in with your opinion below.

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