Everyone gets annoyed at advertisements on their favorite sites, but the ads just keep coming. No matter where you go anymore, chances are you will be greeted by several ads with promising results. However, rumor has it that Facebook Inc (NASDAQ:FB) is now allowing advertisers/marketers to place their ads directly onto users news feeds. The question of how this will affect their users will likely remain for a while, but lets look at how this could affect the company.
It was rumored for a while that Facebook Inc (NASDAQ:FB) would take after Google Inc (NASDAQ:GOOG)‘s advertising method of YouTube. YouTube allows thirty second videos that users can skip after just five seconds. YouTube alone generated nearly $2.7 billion for Google Inc (NASDAQ:GOOG) in 2012. Facebook generated under $5.1 billion last year with just over 84% of that derived from ads. There is one major difference between Facebook’s ads and YouTube’s ads. Facebook’s ads are there to make money, and so are YouTube’s; however, YouTube is geared to direct users to other services offered by Google. Facebook Inc (NASDAQ:FB)’s ads do not direct you to other Facebook services, simply because they don’t have any other services.
So, what did Google make on ads last year between all of its services? “Just” $42.4 billion. Interestingly, Google also derives just over 84% of its revenues from ads. So will Facebook really benefit from allowing ads to be placed in their users news feeds? Initially, probably. Long-term? Probably not. Users are already annoyed with the bombardment of advertisements they receive, and will not enjoy them being placed involuntarily into their news feeds. Will users leave? Time will tell.
Now, while Facebook Inc (NASDAQ:FB) doesn’t offer other services, they do offer games. People love games. Executives from Facebook have revealed that game developers generated approximately $2.8 billion in revenues last year. Last year Zynga Inc (NASDAQ:ZNGA) generated nearly $1.3 billion in revenue. When people play games, they receive ads for other games, often based from the same company. This is a similar approach to that of Google. 47.6% of Zynga Inc (NASDAQ:ZNGA)’s revenue are generated from just three games: Texas HoldEm Poker, FarmVille, and CityVille.
Statistics show that over 250 million people play games on Facebook each month. Last month, 263 million clicks were redirected from Facebook to Apple Inc. (NASDAQ:AAPL)’s App Store and Android’s Google Play store. So how many more people are installing games? 75% more. Facebook currently has over one billion users a month with access to over 200 games. There has been a 24% growth in people that use Facebook Inc (NASDAQ:FB) games since last year. The largest part of this is likely due to the structured ads on these games.
A quick comparison of numbers should show who shows the best investment opportunity among these three companies. Google, Facebook, and Zynga’s P/E’s are 25.1, 2,500, and -12.2 respectively. These companies FCF yields are 5%, .6%, and -5.2%. Due to Zynga’s negative FCF yield is because the company currently shows a negative FCF. Facebook Inc (NASDAQ:FB) and Zynga are both new companies, but have seen revenue increase for three consecutive years. Google’s have increased for more than a decade.
The are many reasons I am not big on buying Zynga or Facebook. The biggest reason I don’t believe in buying Zynga is that they are dependent on companies such as Facebook to market their products. If, for some unknown reason, Facebook shut down tomorrow, a huge percentage of Zynga’s revenue, profit, and customers would disappear. Facebook Inc (NASDAQ:FB), although it holds more users than any other social media network, hasn’t done anything to distinguish itself from any other networks such as Google +.
The Foolish bottom line…
Google has become a force to be reckoned with. They are the largest search engine worldwide, they own YouTube, Google +, and one of the leading web browsers in Google Chrome. Obviously they are a major player in the mobile world with their Android OS as well. They have become a major player in several major industries, and show no reason of slowing down. At this point, Google seems to be a far better buy than either Facebook or Zynga.
The article Facebook to Advertise on Your Newsfeed? originally appeared on Fool.com and is written by Tyler Wofford.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
