Why will Facebook make money?
The biggest problem at the time of Facebook Inc (NASDAQ:FB)’s IPO was that its price was not justified considering its monetization policy. Let us look at how Facebook Inc (NASDAQ:FB) will make money and also turn out to be a good investment.
Facebook Inc (NASDAQ:FB)’s continuous efforts and smart strategy are earning the company profits. Advertising is a major contributor to the company’s revenue; this is the reason why mobile advertising has also been introduced to its customers. For Facebook, 88% of the revenue comes from web and mobile advertising, while only 12% comes from payment and fees.
The biggest advantage is the company’s high user base of around 1.1 billion; the company takes advantage of the user data to promote other company products. Suppose a user has updated his status as a fitness freak, this information is used by advertising companies to advertise products related to the gym on the user’s screen. There is this mutual relationship wherein Facebook gets paid for advertising, and the company can use the database and its information for potential customers. Mobile advertising is yet to be fully explored by the Facebook. Success on this front will generate significant revenues as the number of users, particularly in Asia, is increasing at a great pace. Second-quarter 2013 results shows that there has been 83% increase in revenue from Asia, compared to 44% in the US.
Payments and fees are the other area that generates revenue for Facebook. This is mostly from game-making companies like Zynga. Smartphone and mobile users contribute a majority of the company’s payment and fees revenue. All this boils down to the fact that an increase in daily active users will increase the company’s advertising and payment and fees revenue. The graph below shows that there has been 26% increase in the number of daily active users from second quarter 2012 to second quarter 2013. Asia, being the greatest contributor to this increase, shows that there is still huge opportunity for Facebook to take advantage of and monetize the opportunity.
Google to face tough battle
Google Inc (NASDAQ:GOOG)’s advertising and other revenue, such site and network revenue, has increased by only 20% from second quarter 2012, as compared to that of Facebook, which has increased by 61%, to $1.6 billion, from last year. Moreover, Facebook’s mobile ads have generated 41% of revenue for second quarter 2013, up by 14% from second quarter 2012. This has affected Google Inc (NASDAQ:GOOG)’s and Yahoo! Inc. (NASDAQ:YHOO)‘s earnings, which came in lower than the expected. This is particularly because users are shifting to wireless internet devices and anything which is easily accessible by their smartphones or iPads is what they are aiming at. Facebook is a winner here because it has attracted users because of its unique customer-capturing strategy, wherein users keep logging in to the site out of sheer curiosity. Moreover, Google Inc (NASDAQ:GOOG), whose biggest strength was internet search ads, is not user-friendly on mobile devices as users are finding it difficult to click the search on their mobile.
The other drawback, which Google Inc (NASDAQ:GOOG) is facing, is that its growth has slowed down relative to earlier periods. With a price of $885.35 coupled with slow increase in revenue, it does not seem attractive anymore. Financials show that actual sales of $14.1 billion for Google has been less than the analysts’ estimate of $14.4 billion. Actual EPS of $9.56 also missed analysts estimates by 13%.
Yahoo will also face the consequence
Financials for Yahoo! Inc. (NASDAQ:YHOO) continue to deteriorate, with a revenue decline of 7% for second quarter 2013 from second quarter 2012. Adjusted EBITDA has also decreased by 7% to $369 million on a year-over-year basis. Facebook’s surge in revenue through mobile ads will have a negative impact on Yahoo! Inc. (NASDAQ:YHOO) as the company is yet to upgrade its mobile apps to make them user-friendly and simultaneously use strategy to increase the number of mobile users.
Even with the change in management and Marissa Mayer coming in last year, Yahoo! Inc. (NASDAQ:YHOO) has not shown considerable improvement to meet investors’ expectations. Now, with the news of Mickie Rosen, entertainment executive head, resigning, the media arm of the company might also suffer a setback. The negative news is being discounted in the stock price with Yahoo! Inc. (NASDAQ:YHOO) shares falling by 4.3% to $27.86 after the announcement.
The bottom line
Facebook has proven itself as a strong competitor to these internet service providers. The company’s continuous efforts in the right direction will surely help Facebook improve its monetization and give good returns to its investors. I would suggest Facebook as a moderate buy keeping in mind the company’s strategy working in the right direction as compared to Google and Yahoo, whose performance has slowed down in recent times.
The article Why This Social Networking Giant Will Continue to Grow originally appeared on Fool.com and is written by Anjum Khan.
Anjum Khan has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Yahoo!. The Motley Fool owns shares of Facebook and Google. Anjum is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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