I’ve been saying it for months, Facebook Inc (NASDAQ:FB), with 1.2 billion users, has the potential to monetize itself on a level that no other social media company can accomplish. On Tuesday, its post-earnings rally continued with gains of 6%, as the company gave us yet another reason that it’s light-years ahead of competing companies.
What’s the news?
The big news on Tuesday was that Facebook Inc (NASDAQ:FB) plans to sell 15-second TV-style ads on its site. These ads will be age and gender targeted, and Facebook Inc (NASDAQ:FB) will charge between $1 million and $2.5 million per day.
If we use simple math and assume Facebook Inc (NASDAQ:FB) sells just one ad per day, then we can multiply $2.5 million by 365 to equal over $900 million. However, as Facebook Inc (NASDAQ:FB) noted, these ads will be gender and age targeted, meaning that Facebook Inc (NASDAQ:FB) could run 4-6 ads per day, racking in another $4.5 billion in annual revenue with this one service alone.
Will it work?
Immediately, Facebook bears are going to say that this plan will never work and that advertisers will not pay for 15 second slots on the social media company’s site. However, I beg to differ. Facebook reported having 699 million daily active users at the end of June, which was up 35% year-over-year.
In contrast, last year’s Super Bowl had 108.41 million viewers, and advertisers paid $4 million for a 30 second commercial spot. Therefore, Facebook’s fee would be half the Super Bowl rate for half the ad time. However, the exposure could be several times greater.
With the Super Bowl, advertisers get one shot at making their commercial memorable. But with Facebook, the ad would be shown several times per day, and Facebook would have a window of billions in accumulative page clicks to show the ad. With that said, I think advertisers will rush to use this service, and Facebook’s $6.1 billion in revenue during the last 12 months could easily double depending on the demand.
Is there upside from here?
Personally, I have owned Facebook at different times since its IPO. The company has went through its growing pains, but I’ve always believed that by having over one billion users and great social interaction, that Facebook had the potential to become the next Google.
Strangely, Facebook’s valuation is somewhat cheap compared to several companies that operate a similar business model, most notably LinkedIn Corp (NYSE:LNKD). Facebook trades at 14 times sales while LinkedIn Corp (NYSE:LNKD) has an industry best 20.3 times sales. The reason is because LinkedIn Corp (NYSE:LNKD) has done phenomenal at monetizing its users.
LinkedIn Corp (NYSE:LNKD) has just 225 million users and earns nearly $5 per user in annual revenue. Facebook earns about $0.20 per user. Moreover, LinkedIn Corp (NYSE:LNKD)’s user engagement is tiny compared to Facebook. People don’t chat, or engage to the same degree on LinkedIn Corp (NYSE:LNKD), due to it being a business networking site where most communication takes place in private email.
On LinkedIn, I have 930 connections, and post an update several times a day via tweets. However, in the last six months, I have had less interaction with all of my combined LinkedIn posts, as I have had with any one typical Facebook post. This lack of activity makes LinkedIn less appealing for advertising, and at $5 per user, I can’t imagine how much more revenue it can squeeze from users.
Final thoughts
In my opinion, Facebook is a sleeping giant, a company that is about to erupt with fundamental gains. This one advertising service alone could double its revenue, and now with the company aggressively penetrating mobile, there is even more room for opportunity.
With that said, Facebook’s discount to sales relative to others in the space (LinkedIn, Yelp, Zillow) makes the stock very attractive. Its $0.20 per user gives it great fundamental upside, and its unprecedented user base means the company is here to stay. Therefore, I say Facebook is a great buy, and from this point forward — following my post-earnings buy — I plan to hold for the long-term.
The article Is This Advertising News a Fundamental Game-Changer? originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols owns shares of Facebook. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Brian 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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