Facebook Inc (FB), Baidu.com, Inc. (ADR) (BIDU): Two Skyrocketing Internet Stocks to Buy, One to Avoid

One of the most important trends currently affecting Internet companies is increasing usage of mobile devices to access the web. On one hand, it is a positive development because it means an increased number of visitors and the time they spend on the web. On the other hand, it is a big concern as many Internet companies have not yet been able to come up with a way to monetize increased mobile usage effectively.

Mobile phones have smaller screens compared to traditional PCs and hence Internet companies need to come up with new ways to effectively monetize ads on mobile. Last year, at the TechCrunch Disrupt conference, Facebook Inc (NASDAQ:FB)’s founder and CEO Mark Zuckerberg said “On mobile we are going to make a lot more money than on desktop.” The key question that remained was how. Many bears were skeptical about Zuckerberg’s claim at that time.

A killer quarter

If we look at Facebook Inc (NASDAQ:FB)’s most recent quarterly results, it appears that the bears were wrong. The company posted better-than-expected results driven by strong mobile ad revenues, and Facebook Inc (NASDAQ:FB)’s stock skyrocketed post-earnings. Facebook Inc (NASDAQ:FB) reported revenues of $1.8 billion versus consensus expectations of $1.62 billion. Mobile ad revenues of $656 million were way ahead of $454 million consensus estimates causing most of the upside.

Mobile advertisers are achieving good return on investment from newsfeed advertising. This is leading to higher demand as well as higher pricing of the service. Total active advertisers on Facebook Inc (NASDAQ:FB) reached approximately 1 million in the second quarter of 2013, which is almost a 100% jump from the same quarter a year earlier. The interesting thing is that Facebook Inc (NASDAQ:FB) achieved this growth in number of advertisers without compromising on pricing. In fact, the price per ad increased 40% in the US and Canda. Also, increasing daily active users and rising engagement also bodes well for Facebook.

Facebook is currently trading at 39 times its forward price-to-earnings ratio. Although its valuation is somewhat on the higher side, I believe the company can sustain its recent stock price momentum given that the biggest investor concern regarding monetization of mobile users has been taken care of.

Similar success

Facebook is not the only company where successful transition to mobile has helped its result and stock price. Chinese search giant Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has also seen similar results. Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s mobile revenues accounted for more than 10% of its total sales for the first time in last quarter. The company’s stock price recorded significant gains as a result.

Baidu.com, Inc. (ADR) (NASDAQ:BIDU) reported better-than-expected results driven primarily by mobile revenues that exceeded estimates. A nationwide marketing campaign in the second quarter helped Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s mobile search to gain traction among customers. Most of Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s customers prefer to advertise on both PC and mobile platforms. The integration of a PC and mobile keyword bidding system also helped the company to redirect some of its PC advertising customers to mobile.