GOOG, FB, TWTR: Who Will Win the Battle for Mobile Ads?

As should be no surprise, the heady growth in mobile ads is showing no signs of letting up. The eMarketer website forecasts a 50% spike to $28.7 billion this year, representing about 49% of all digital ads in the U.S.


In four years, mobile ads are expected to reach nearly $66 billion and soak up 72.2% of all digital ads.

OK, who will be the winners? Well, there are certainly many standouts. But before taking a look at the future of mobile ads, let’s first get more details on the eMarketer study.

For the most part, spending on mobile ads will focus on apps — not the mobile web — on a 3-to-1 basis. Consumers generally prefer to download an app, not visit a site via a mobile browser (which can be a clunky experience).

Next, installation for mobile ads has become a big business (this is where a mobile platform charges for a download, such as from a newsfeed). This category could generate $3 billion in revenues for 2015, up 80%.

What’s more, video is turning into a killer app for mobile ads. The spending on this segment is predicted to increase from $2.6 billion in 2015 to nearly $6.9 billion in 2019.

No doubt, companies like Facebook Inc (NASDAQ:FB), Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Twitter Inc (NYSE:TWTR) should grab a good deal of the dollars for mobile ads. They have substantial user bases and global brands, which will remain big attractions for advertisers.

But these companies also have tremendous infrastructures, which include sophisticated systems for mobile ads, tools to help developers create apps and rich features, such as video.

The problem is that Wall Street has already been factoring in the growth potential, especially with TWTR stock. It now has a forward price-to-earnings ratio of 61.9.

Yet TWTR stock could be vulnerable to a pullback. The fact is that the company’s user growth continues to languish. In the fourth quarter, the company added only 4 million new users for a total of 288 million.

The issue is that the service may not be mainstream but instead driven by events, such as the Olympics or the World Cup. But the Twitter platform also appears to be getting too cluttered (keep in mind that this was a big factor for the implosion of MySpace).

One of Twitter’s early investors, Gary Vaynerchuk, recently noted that the service has turned into a “massive firehose” and this could actually cause Twitter to “die.”

Rather, on a relative basis, GOOG stock is the one where the valuation has remained fairly tame. Its forward P/E ratio is at only 17. And for this, investors are getting great assets like Android and YouTube.

But GOOG stock could face some trouble. The company’s search business has been under pressure, with the market share dropping from 79.3% to 75.2% last year. Social platform like FB and TWTR have actually become ways for users to search.

GOOG has also been having a tough time coming up with cool products lately. In fact, there have been some notable flops like Google Glass and the G+ social network.

OK, then what about FB stock? All in all, it looks like it could benefit the most from mobile ads.

The company’s efforts have actually been stunning. Just a few years ago it looked like it was on its way to oblivion because its mobile apps were downright terrible.

But as of now, FB gets about 69% of ad revenues from mobile, up from 53% in the year-ago period. Then again, the company keeps finding ways to grow its user base. In the latest quarter, the company added 40 million more users for a total of 1.4 billion. Much of this came from other countries. Oh, and the mobile user base came to about 1.2 billion.

But the key is the tremendous data. In other words, advertisers can highly target mobile ads — at a tremendous scale.

Granted, the valuation on FB stock may seem pricey, at a forward P/E ratio of 32.6. But this seems more than reasonable in light of the continued hefty growth ramp. In the fourth quarter, revenues surged 49% to $3.85 billion, which handily beat the Street consensus of $3.77 billion. Yet FB has various other growth levers it can capitalize on, like Instagram, WhatsApp and mobile video.

In other words, for investors looking for a play on mobile ads, FB stock remains very attractive right now, in terms of its core assets, growth profile and valuation.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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