Facebook Ads Will Lift FB Stock Higher

FB earnings should deliver strong mobile ad revenue

   
Facebook Ads Will Lift FB Stock Higher

It seems like only yesterday when Wall Street was lamenting Facebook’s (FB) lack of a digital strategy. But CEO Mark Zuckerberg wisely ignored the naysayers and has developed a strategy that is working like gangbusters — mobile Facebook ads.

Facebook185 Facebook Ads Will Lift FB Stock HigherAnd now, Facebook is reportedly set to launch a network enabling advertisers to buy ads on Facebook’s widely popular mobile App and on features created by other developers. Other companies such as Google (GOOG) and Apple (AAPL) are developing similar offerings, as is Twitter (TWTR).

But Facebook has one thing that these other tech stocks lack — more than 1 billon users. Facebook, the pioneering social network, has reams of valuable data, which will attract throngs of advertisers. After all, when it comes to advertisers, the more information marketers have about consumers, the better.

Mobile Facebook Ads Are Killing It

Mobile is a huge deal for Facebook. During the first quarter, Facebook earned more than half of its revenue from mobile ads, which proves that Facebook is investing in the right place. 

According to market researcher Gartner, spending on mobile advertisements is expected to skyrocket about 400% between 2011 and 2016 as devices such as tablets and smartphones continue to grow in popularity. Mobile revenue is forecast to hit $24.5 billion on 2016. And eMarketer forecasts mobile ad spending to rise to $31.5 billion in 2014 versus $18 billion in 2013.

Investors will get a clearer picture on Facebook’s performance when it reports quarterly results later this week. Facebook’s share of mobile spending is expected to rise to 21.7% — an increase from 17.5 percent last year, according to eMarketer. That number may prove to be optimistic, however — especially since broadband adoption continues to grow at high rate in developing countries.

Still, Facebook’s popularity is mind-blowing. A recent study found that 20% of all Internet traffic comes from Facebook and Pinterest. And the importance of mobile Facebook ads cannot be underestimated. A 2013 report from Shareaholic found that publishers saw a 253% increase in mobile referrals from Facebook. That’s a statistic that Twitter among others will find difficult to beat, and it underscores the strength of Facebook ads.

And the company is still pushing forward in mobile. Today, Facebook unveiled a new feature called “Nearby Friends” which helps people figure out which friends are near their location. It’s another way to keep users returning to the mobile app, where they’ll be sure to encounter more Facebook ads.

But real question is: Will that be enough to jumpstart FB stock again?

FB Stock Concerns

Shares of FB stock rose 140% in the past year, but the growth rate has slowed recently. FB is down 7% in the past month, compared to a flat performance by the S&P 500. Plus, FB stock continues to trade at an expensive valuation, currently at a price-to-earnings multiple of about 99. And expectations heading into the quarter are very high. Earnings per share are expected to double to 24 cents, while revenue is expected to hit $2.35 billion — an increase of 61% from the previous year.

At such a high valuation, the stock is at risk for taking a significant hit if the company fails to meet those expectations.

But the biggest wildcard for Facebook investors is Zuckerberg. He recently acquired WhatsApp for about $19 billion and Instagram for $1 billion even though both were small, development-stage companies that have a potential to help grow Facebook’s mobile businesses — the driver of Facebook ads.

Zuckerberg has been quoted as saying that he is “done” with acquisitions for a while as he integrates the new companies into the fold. But his checkbook isn’t going to be gathering dust anytime soon. If Zuckerberg stumbles across a company with a technology he wants, he will certainly buy it regardless of whether it dilutes existing FB stock.

However, Wall Street sees better times ahead for Facebook, and it’s not too late for investors to get on board. Shares of FB stock are trading at about 14% below their average 52-week price target of $74.06, and short sellers, who profit from share price declines are avoiding Facebook as well. The short interest in Facebook equals about 2.2% of its overall float, indicating that many investors expect Facebook stock to remain stable for now.

So, yes — Facebook has struggled recently, and Zuckerberg is throwing out crazy amounts of money to acquire startups. But if they add to the dominant performance of Facebook ads, it should all be worth it, and FB stock investors are going to happy in the long term.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/04/facebook-ads-fb-stock-earnings/.

©2014 InvestorPlace Media, LLC

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