Online publishers like Facebook (FB) are fond of promoting mobile as the next big thing that will surpass television as an advertising medium, but is this realistic? It is important to remember that companies need to talk up expectations and sentiment to maintain a strong stock price. Mobile is growing with increasing smartphone penetration and faster wireless Internet speeds. Still, television has a number of inherent advantages that make it very difficult to replace.
What Do the Numbers Show?
An Edison study from 2012 found that smartphone users use the Internet around three hours and 24 minutes per day and they watch television for three hours and 20 minutes per day. According to the same survey, around 46% of smartphone users browse the Internet several times per day on their smartphone. These figures show that while smartphone users may spend more time on the Internet than viewing television, smartphones only account for a portion of Internet use. On a viewing time per day basis, television still comes out above smartphones.
Tablets are a growing part of the mobile ecosystem. A recent study found that tablet users spend an average of one and a half hours per day browsing with their tablets. Tablets' use peaks around eight to 11 o'clock at night, the same as prime-time television.
Taking smartphone and tablet use together, mobile's daily usage looks similar to television's. Smartphone penetration in the U.S. is expected to continue growing and this will only swing the numbers in mobile's favor. An important caveat is that many people multitask with mobile devices while watching television.
On a dollar basis, television is still America's largest ad medium and this is not expected to change. It is not difficult to understand why. Consumers are used to being interrupted from their favorite show for a couple minutes to be shown ads. Imagine if people were browsing Facebook only to be interrupted by a 30-second popover. Users would be outraged and flee to competing social networks.
For mobile users, Facebook is forced to place just a few small ads in their content. This has allowed the company to grow its mobile revenue, but it offers nowhere near the exposure as a prime-time television commercial. Industry projections show that Facebook could grow net U.S. mobile revenues from $0.39 billion in 2012 to $1.86 billion in 2015, around 48% of Facebook's expected U.S. digital display ad revenues in that year.
Where to Invest?
Though Facebook is expected to enjoy fat revenue growth, its earnings won't necessarily justify current valuations. With expected 2014 earnings per share (EPS) of $0.48 and a stock price above $24, it is trading at a forward price to earnings (P/E) ratio above 50. It is very expensive, considering its low earnings before interest and taxes (EBIT) margin of 10.7% and the fact that there are other strong competitors in the mobile space.
Google (GOOG)'s ownership of YouTube is very important. Consumers are slowly becoming accustomed to pre-roll ads that play before some videos. Google is showing that it can compete with television as a medium and offer similar ads. Mobile video is growing and it already accounts for half of some network's mobile traffic. Google's strategic position in traditional online video easily transitions to mobile and paints a very positive picture of its future.
Google trades at much more reasonable multiples than Facebook. With an expected 2014 EPS of $44.81 and a stock price around $820, it trades at a forward P/E ratio around 18. Its EBIT margin of 26.8% is more than twice Facebook's. The company isn't trading at sky-high multiples and by 2015 Google is expected to control the largest share of net U.S. mobile Internet display ad revenues.
A Company to Avoid
The previously cited projections paint Pandora as the third-largest player in the U.S. mobile market based on expected net mobile internet display ad revenue share in 2015. Pandora provides a combination of free and paid internet radio services. The U.S. government has set royalty payments so high that Pandora has had negative operating income before depreciation and amortization for two of the last four quarters.
The company is expected to post a negative EPS of $-0.15 in 2014 and $-0.02 in 2015. Even with a three-year revenue growth rate of 97.9%, profits are very unstable. The company is stuck fighting against the entrenched record industry, a dangerous proposition.
The mobile space is growing, but television is growing as well. Google is an attractive investment because its video assets let it provide television-quality ads, but in the mobile medium. Facebook isn't as attractive with its higher valuations and less persuasive display ads. The Internet radio company Pandora will benefit from a growing mobile ecosystem, but it is not an attractive investment. Its profits are unsteady and dependent upon it being able to play the political game better than experienced record companies.