Facebook (FB) is an Internet juggernaut, with more than 1.3 billion monthly active users and about $8 billion in annual revenue derived mostly from advertising sales.
But FB stock largely moves based on a very tiny numbers — namely, the “revenue per user” that is derived from how much money each of those 1.3 billion people is actually worth to the company.
For instance, according to the most recent Facebook earnings, the average revenue per North American user is just $6.44. Think about that — all those selfies and status updates you see are only worth a measly $6.44 per quarter to FB stock.
Click to Enlarge Conversely, however, even a small uptick in the revenue per user means big things for FB stock. After all, squeaking out just 64 more cents per user per quarter would equal a 10% bump in Facebook revenue per user in North America. And elsewhere in the world — like Asia, where the average revenue per Facebook user is a measly $1.08 per quarter — just a few pennies here and there means significant growth.
Thus it’s not a surprise that much of Facebook’s efforts are on optimizing its advertising network to pinch pennies and get just a little more juice out of every ad impression it makes.
FB Takes on Google Ad Network
Facebook will unveil a new advertising platform next week that will improve how marketers target ads, and subsequently how much they pay Facebook as a result.
This product — called Facebook Atlas, according to reports — is a revamped version of a product it purchased from Microsoft (MSFT) in 2013 that offers analytics to marketing firms. That data includes which ads people clicked on, what kind of FB user saw their ads and other information that is crucial to advertisers trying to get the best performance on Facebook’s platform.
But most of all, Facebook Atlas will provide a new “bidding” tool for ads that allows marketers to compete with each other for the best customers — which naturally means more revenue for FB stock as they drive up costs for each other when it comes to prime prospects.
Also important here is the fact that Facebook will not relent on its marketing fight with Google (GOOG), which currently dominates the online advertising space. The data that FB stock is trying to provide is theoretically as powerful — or perhaps more powerful — than the targeting information GOOG provides its ad buyers.
Now, only time will tell if this new platform is indeed a success and whether marketers find Facebook ads more effective than their current marketing buys via Google.
But FB stock investors should be encouraged. While Facebook admittedly doesn’t get a whole lot of cash per user right now, it has consistently taken big strides to raise its revenue per user metrics, and this Atlas launch could continue that trend.
And if revenue marches higher, expect FB stock to march higher, too.
Take note, Twitter (TWTR).
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.