Facebook Has What it Takes to Become Wall Street’s Darling

August 6, 2013 Leave a comment

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Facebook (NASDAQ: FB) seems to have finally shaded off its botched IPO nightmares following its recent highs. The company has already breached its IPO price of $38, slightly over 14 months since going public. As people question the sustainability of the social networking giant’s current rally, I am even more bullish than ever. I have always been bullish on Facebook, even when it traded at $17.55, nearly a year ago.

The social media company is definitely destined for big things in the near future. Its leap into mobile gaming could yet provide it an avenue for further monetization of its massive user base.

The catalysts

After a long battle, which lasted just over 14 months, Facebook has finally gotten over its botched IPO price tag, which made the stock unattractive. Many people felt that the IPO price was a rip-off, as the company had little to justify the price when the stock continued to tank, leading to more than a 50% loss in market value.

However, things have now changed as the company breached its IPO price a couple of days ago. This is likely to make the stock more attractive to the market coupled by several other factors that support a bullish outlook.

Mobile is getting better: Facebook’s investment in mobile seems to be finally paying off. The platform’s monthly active users now stand at a massive 819 million. Ad revenue in the second quarter from the platform came in at $656 million up 76% from the first quarter, and swept analyst estimates of $450 million.

This is indicative of the successful campaign to monetize mobile traffic, which has been a major challenge over the last year. Google (NASDAQ: GOOG), the creator of the Android platform, has also struggled in a bid to make mobile count, despite offering its OS free to use in the market.

Facebook seems to have taken a huge advantage on Google’s freeware, launching its Facebook Home for Android devices. Analysts say that Facebook Home has played a big part in driving mobile ad revenue, and I concur. Indeed, the idea of making the Facebook platform the home screen for many Android devices has enhanced the level of ad-clicks.

Meanwhile Google continues to suffer from the shift to mobile. The search engine giant’s revenue missed analyst estimates in the most recent quarter despite growing by 20% year-over-year. However, this had little to do with Facebook Home, as the company’s average ad prices tanked following the shift to mobile.

In fact, Google’s average price per ad has been declining over the last three quarters, down 15% in the third quarter of 2012, 6% in the fourth quarter and 4% in the first quarter of this year. In the second quarter, the average price per ad dropped by a further 6%, as mobile advertising continues to weigh on web advertising. This was the same case for Facebook over the last year, but the social networking giant seems to be getting things right.

Engagement levels remain high: Facebook’s engagement levels stand at 30 minutes, according to the company’s recent quarter results. This means that nearly 700 million people spend 30 minutes each on Facebook every day.

The company estimates that it now attracts more than 1.15 billion active users every month, which is nearly half of the number of people who are connected to the internet globally. Research by Nielsen shows that 2.4 billion people are connected to the internet, meaning that approximately one in every three of those people use Facebook every day.

Video ads: The company has decided to move to TV-like ads. The company is counting on its massive user base to help drive its new campaign, and according to Piper Jaffray analyst Gene Munster, there is a massive upside in video ads.

There has hardly been any notable threat to Google’s YouTube over the years, with Daily Motion only highly influential in some parts of Europe. However, Facebook seems a more likely competitor to YouTube if it can make the most of its user base count.

Mobile gaming: This may not be an immediate hit for Facebook, but the company’s social nature could play a huge part in making the venture a success. In general, there is an opportunity in gaming, but social gaming will likely depend on the company’s social stature, which happens to be Facebook’s strength.

Zynga (NASDAQ: ZNGA) could soon lose its tag as a leader in social gaming, which thus far, has remained a huge challenge. Reports indicate that Facebook has already shown its intention to venture into real money gaming, prompting others to speculate that Zynga was about to rebound. However, it is Facebook that I see gaining from this move as it continues to perform a summarized revocation of its partnership with Zynga.

This is, perhaps, the reason why Zynga has moved swiftly to cut funding on some of its franchises, especially the ones that have disappointed from one quarter to another. Currently, Farmville is the standout performer as the company attempts a critical turnaround.

The bottom line

The company’s desktop ads unit and payments unit continue to dwindle, but this has been offset by massive gains in mobile. The company is moving well, and in tandem with the mobile shift, which is a good thing.

Currently, Facebook’s market share in terms of internet usage stands at nearly 50% on a monthly basis and about 30% daily. However, the company’s share of online ad-revenue stands at about 5% to 10% leaving a huge window of opportunity. With its current gains in mobile, and other traffic monetization avenues being created, this is a perfect route to making the huge market share count going forward.

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