Now what for Facebook? Capitalizing on changes in digital advertising will lift shares

Share price could head higher.

 
Mark Zuckerberg Age: 28 Role: Facebook CEO and Co-founder New Estimated wealth: $12- $24 billion The  28-year-old whiz kid and Harvard dropout is the CEO and   co-founder of Facebook  and he owns the lion’s share (24%) of the   company. Zuckerberg launched the website  from his Harvard dorm room and   eventually opened Facebook to the public when he  saw how popular it   could be. With financing from his dad and his roommates,  Zuckerberg was   able to develop the site into the social media giant. A programming prodigy and classics geek (he  is known to quote the Iliad in ancient  Greek), he is also a canny businessman who foresaw the enormous potential of his  work before anyone else. If Facebook  is valued at $50 billion, Zuckerberg is comfortably   worth $12 billion. For  comparison, Bill Gates is currently worth $61   billion,  while the richest man in the world, Carlos Slim, is worth $69   billion. However, valuations of the company  are now hitting as high as   $104 billion. If that’s the case, Zuckerberg’s  wealth goes to $24   billion. Like. One interesting  fact: to avoid a giant tax headache, Zuckerberg will   sell about 30 million of  his own shares (about $750 million) on the   first day of trading.
Mark Zuckerberg CEO of Facebook.

Noticed a few more ads in your Facebook newsfeed lately?

According to analysts, it’s a sign the company, and other websites, have just started to scratch the surface of their digital advertising potential, especially mobile advertising potential.

As advertisers begin to pour more money into digital media, Facebook is set to capitalize and begin the long haul to satisfy some sky-high expectations which would eventually put the stock price over and above last year’s catastrophic IPO.

“On one hand, they’re in the early stages of monetizing their user base, and on the other hand, they’re even earlier in monetizing their mobile user base,” said Tom Forte, an analyst with Telsey Group.

“The message out of the June quarter is that they made tremendous advancements in that effort, which is why their mobile advertising grew at such a fast rate.”

It’s been a big week for Facebook, as the company announced impressive quarterly results that far surpassed most expectations. The company’s performance resuscitated its share price, swinging it from $25.35 to about $34.00. That’s still a bit shy of that $38 IPO price, but Forte predicts that in the next 12 months, it will be up to $41.

Overall revenue was up to $1.81 billion, far more than the Wall Street prediction of $1.62 billion. Business Insider also reports that Facebook’s mobile monthly active user rate increased to 819 million, a 51 per cent jump year over year.

Mobile advertising has been the crucial aspect Facebook’s success this quarter, and a major focus of its advertising strategy in recent months. Mobile advertising revenue came in at $656 million this quarter, which “was materially higher than what the Street thought, including ourselves,” said UBS analyst Eric Sheridan.

In fact, Facebook beat UBS’s prediction by about 40 per cent on mobile ad revenue. “Quite a sizeable beat,” added Sheridan.

The company has built the mobile advertising sector of their business practically from scratch in a very short period of time.

As noted by Reuters, “a year ago [Facebook] had almost no mobile advertising. In the second quarter this made up 41 percent of total advertising, jumping from 30 percent in the first quarter.”

Sheridan has seen an increasing acceptance of Facebook’s potential among advertisers, and that companies are putting more of their budgets towards the returns they can get from mobile ad investment.

Darren Henderson, leader PricewaterhouseCoopers’ media and entertainment consulting practice, has also seen this trend start to unfold. Traditional advertising revenue is still the bigger market, but digital advertising “will continue to be the big growth agent, and we actually think that all digital sources combined will exceed the traditional sources over the next five years,” he said.

The challenge will be in ensuring that digital advertisements are targeted to the right audiences, which is still an issue not just for Facebook, but other major websites such as YouTube and Google.

“If I go on Facebook and I see an ad that’s totally unrelated to what I’m interested in, that’s more of a nuisance,” said Forte.

“This is what [Facebook is] working towards… and I think that they’ll eventually get it right, but I think it’s going to take a long time. And they’re not the only ones facing that.”

What companies need to figure out is how to put all the personal information available online—things you’re interested in shopping for, blogs you read, the area you live in—to use for advertisers. This leaves Facebook as a particularly well-primed entity for the new frontier of digital advertising, which aims to “know” the person they’re advertising something to. Not only does the website have over a billion users, it’s a space where people have been inputting their personal information for years, which makes it easier to create ads that specifically target the individual who’s viewing them. The challenge will be in figuring out how to make these ads relevant to individual users, and, noted Henderson, where companies and users will draw the privacy line.

“Those organizations that really know who their customer is, [and] then have really good data on their customer… they’re the ones that are very relevant,” he added.

The data that Facebook and Google have about their customers that will be most useful is location information, said Henderson. Companies have already imagined the day they’ll be able to put ads into mobile sites that are relevant to where the user physically is at a given moment.

“That’s what retailers want, they want to be able to get at you when you’re actually near that point of decision,” said Henderson.

“It’s all about digital and location and trying to get into the minds of the customers.”

Ads on Facebook will soon be moving beyond just the newsfeed and the website’s sidebar. During its quarterly earnings call this week, the company mentioned that 15-second video advertisements could be on their way to the site. RBC analysts Mark Mahaney and Andre Sequin also wrote in a research note that Facebook-owned site Instagram, which has 130 million monthly active users and is “growing faster than Facebook at a similar scale,” offers an entirely new space to begin selling ads, as it hasn’t been monetized yet.

Mahaney and Sequin’s share price target has moved to $40.


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