Wake up little piggies – if you’re not paying for it, then you’re the product being sold.
|Credit: Geek and Poke|
Sometimes we mislabel companies based on a perceived service when in all actuality, they are selling something completely different.
Contrary to popular consensus, Facebook (NASDAQ: FB) is not a social media company.
That might sound a little odd, but the fact is, Facebook is actually just an advertising company using social networking as a medium to get its product to market. Facebook generates approximately 75 percent of its revenue through advertising, and social media is simply the virtual billboard allowing it to do so.
That being said, any valuation of Facebook should largely be assessed by the company’s ability to generate advertisement revenue.
But before we get into that, let’s quickly address the elephant in the room: Facebook’s IPO disaster.
The initial overvaluation of Facebook created a scab that has been picked at for some time. But even when you pick at a scab, it gets smaller every time. It’s been over a year now, and there is nothing left to pick – the negative concerns surrounding Facebook’s IPO have already been baked into the stock by now.
With the hype now over and the bear-herd out of the picture, it is time to take a fresh look at Facebook. And like I said before, this company should be valued by looking at revenue and advertising – a growing market of which Facebook is set to reap the benefits.
Bringing Home the Bacon
First, let’s look at Facebook’s revenue growth. Facebook has generated an increasing amount of annual revenue from 2010 to 2012 with $2.0 billion, $3.7 billion, and $5.1 billion sequentially.
Now, this is impressive, but Facebook has only been generating sales from standard banner and display advertisements, which tend to have very low rates (as low as 0.10 percent) of user engagement. The company is now adding video advertisements, which are far more appealing to potential customers due to increased viewer engagement and conversion rates (0.85 percent to 1.92 percent).
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You can try to bash the man for his unprofessional demeanor, but Mark Zuckerberg is no dope. Facebook bought Instagram for $1 billion on April 12, 2012 and waited until the opportune time to monetize the site rather than throwing up banner ads right away. The fact is, banner ads wouldn’t have brought a significant return on investment and also would have risked consumer backlash.
Instagram is finally expected to roll out video advertisements this year with a seven-figure revenue potential. Even if just half of that goal is met, the Instagram acquisition would be worth its purchase price in a matter of years.
Facebook’s advertisement model now boasts the four most important factors in digital advertisement: local, mobile, social, and video. Here are a few facts and statistics that bode very well for Facebook’s model:
- Mobile video views increased 300 percent in 2012.
- Facebook’s mobile user base is growing exponentially faster than its PC user base.
- Video increases social media and digital advertisement engagement by as much as 200 percent.
- Facebook is the second most popular website for viewing video (YouTube is the first).
- Social ad revenue is expected to grow at a compound annual growth rate (CAGR) of 18.6 percent for the next four years.
- Mobile local ad revenue is expected to grow at an astonishing CAGR of 49.3 percent.
- Locally targeted social ad revenue is expected to grow at a CAGR of 26.4 percent.
|Credit: BIA/Kelsey IMG|
One of the most important things to remember here is that Facebook has more user data than anyone else in the world. The company has built up its human-based inventory and is finally ready to release its most important product to date – demographically targeted video advertisements that companies are going to kill for.
Call me crazy, but I expect Facebook to rebound very close to its initial IPO price by the company’s next annual report.
Turning progress to profits,
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