Facebook: The Rising Star That is Doing Everything Right

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Sep 23, 2014

Today morning I had a couple of tabs open on my chrome browser: One was the usual Facebook (FB, Financial) page and the other tab had a report from eMarketer that pointed out the continuation of growth in Facebook U.S. usage. As per estimates, the average U.S. Facebook user now spends approximately 39 minutes/day on its site and apps – up from 38 in 2013 and 35 in 2012. Also, it is important to keep in mind that these figures exclude Instagram and Whatsapp, both of which have a humongous user base.

Drilling into the report

One of the better things that has come out of eMarketer’s report is the fact that Facebook has an impressive 9.7% of U.S. digital ad spending, which is around 3.70% above its digital time share. By contrast, all the other social networks claim 3.9% of digital spending in the U.S. in spite of having around 11.9% digital time share. This is indicative of the fact that Facebook offers a high-value proposition to advertisers because of the content structure that it offers to its users. What I intend to imply is that content driven by Facebook is personal and therefore, the focus of users on the content and ads that are interspersed in the content is comparatively higher. In other cases like that of Pandora (P, Financial), ads are often on in the background and therefore, the users can tune out the ads or not hear them at all.

There is no doubting the fact that Facebook has worked very hard to convince advertisers its audience, customer data and targeting capabilities are the best advertisers can buy, which has contributed to its trending ahead of the market. Owing to the offerings built by Facebook, it has continuously beaten Street expectations on topline as well as bottomline. In the second quarter of 2014, Facebook reported a phenomenal increase of 67% y-o-y in revenue to $2.62 billion and interestingly, mobile ads formed around 62% of total ad revenue. In addition to a hefty increase in revenue, Facebook also silenced analysts who were doubting the company’s ability to stay popular among teens, by reporting healthy MAUs (Monthly Active Users). The company reported in its earnings call that the MAUs increased 3% q-o-q in Q2 and 14% y-o-y to 1.32 billion.

Why data matters?

Time and again, I have stressed the significance of relevant data in digital advertising; if a company can give the right mix of audience data to its advertisers, it can have its reasonable share of advertising dollars. Well, Facebook is one of those companies that has accelerated at a quick pace and now stands only second to the internet giant Google (GOOG, Financial) in digital advertising. This is because the company has been instrumental in designing a solid portfolio for its advertisers in terms of both reach and return on investment. Let us take the case of video to illustrate this point.

As per comScore’s (SCOR, Financial)Â latest data, Facebook is already the second-biggest video platform among American viewers. YouTube, owned by Google, is still the leader with 157.20 million unique viewers. However, Facebook's steady courtship of YouTube's biggest content publishers could lessen the gap. As per media reports, Google takes a reasonably high cut from its publishers on the revenue that spoils their margin and as such, Facebook is already working on a proposition where it will charge lesser amounts from its publishers. Thus, the company is not wasting any time in pumping up its video ads portal, and it is also important to remember that the company already owns LiveRail, the second-biggest player in video ads (LiveRail's online video ads reach 37.8% of the U.S. population).

Mobile for accelerated growth

This article will be incomplete if I do not include the burgeoning growth that is to be had in the mobile segment. As has been propagated by tech pundits, mobile is going to be the cornerstone of growth for tech companies in the near future and therefore, the companies have already begun beefing up their portfolio.

Around 65% of Facebook’s 1 billion video views per day come from mobile devices and the company has approximately 829 million users who use the website from their mobile phones on a daily basis. Another report from eMarketer that released in July highlights that mobile will lead this year’s total media ad spending in the U.S. Additionally, it is estimated that advertisers will spend 83% more on tablets and smartphones than they did in 2013 –Â an increase of $8.04 billion. By the end of this year, mobile will represent nearly 10% of all media ad spending, surpassing newspapers, magazines and radio for the first time to become the third-largest individual advertising venue, only trailing TV and desktops/laptops.

Therefore, it is evidently clear that mobile is a high growth area in digital advertising and Facebook is well-positioned to take advantage of these trends. The acquisition of Instagram and Whatsapp will definitely be of immense benefit to the company in building its mobile portfolio. Also, Facebook has been on an acquisition and innovation spree lately in order to render an unparalleled mobile experience. For instance, Facebook launched the website Custom Audiences, which enables marketers to target recent visitors to their websites. This is likely targeting, but it’s even more effective because it works across both web and mobile.

Takeaway

Facebook is the upcoming internet behemoth and it is accelerating at a generous pace. It is making all the right moves that will catapult it to become one of the biggest internet companies. Therefore, the company is the best investment choice for investors seeking high growth.