Alphabet Inc (GOOG, GOOGL) is the dominant leader in online advertising, a $55 billion advertising juggernaut. With Alphabet creating upwards of $50 per user (ARPU) in its advertising business, no competitor has managed to compete with GOOGL in pricing either.
Given these facts, it is no wonder that Facebook (FB), a company with the world’s largest network and ad-targeting technology that is second to none, is aiming to become more like GOOGL.
If successful, there’s no question that FB’s revenue will soar, and Facebook stock will follow.
FB Becoming More Like GOOGL
Ever since FB began to monetize its business, there was a clear difference between it and GOOGL.
GOOGL continues to sell ads from Internet search, while FB’s big money maker comes from showing ads in news feeds. FB has since evolved with advertisements, moving into video and Instagram among other things. Nevertheless, FB has still kept quite a bit of distance between itself and GOOGL’s advertising business model.
However, FB now looks ready to be more like GOOGL, or at least create revenue the same way. Late last year, The Verge reported that Facebook is testing a variety of secondary feeds like Style, Travel, Headlines and Marketplace (shopping), among others. On top of these secondary feeds, Facebook will revamp its search bar and will create feeds based on search.
By making this move, FB can show ads based on theme and interest. For example, when users are on the Travel feed, FB can show travel ads from the likes of Expedia. Furthermore, the Marketplace feed would be a great spot for Macy’s, Inc (M) or Fitbit Inc (FIT) ads.
In retrospect, FB has shown ads to its users based on their own preference, but with these changes to feeds Facebook can now implement this technology to show users ads at a time when they may actually purchase a product or service. This creates substantial value for Facebook’s advertisements, an approach that GOOGL has mastered on its way to creating a $50 billion advertising empire.
A Lot of Likes for Facebook Stock
All things considered, with 1.55 billion monthly active users, FB stock has the largest ecosystem in the world, by a mile. Yet, its global ARPU of just $2.97 trails GOOGL by an even wider margin, suggesting that these ad delivery changes could be a missing puzzle piece to accelerate revenue growth and close the gap between it and GOOGL’s ad prices.
If so, there’s a lot to like about Facebook stock. During the company’s last quarter, its ad prices rose 61% year-over-year and ad revenue grew 45%. This is tremendous growth, and with the company adding 500,000 active advertisers in the nine months ended November 2015, 2.5 million total, FB’s growth should continue at a rapid rate.
With that said, whether or not FB actually makes these noted changes to how it delivers ads and its news feed is not necessary for the immediate appreciation of Facebook stock. Currently, there are at least eight big projects that investors are eyeing both short- and long-term with the potential to create additional revenue and profit growth, and mimicking Google’s advertising business model is not one of those catalysts.
Thus, such a move would be an unexpected catalyst, which means it could have a profound effect on Facebook stock if it has the impact I expect.
So while FB might just be in the testing phase, and still many months from a launch of feed changes, investors should watch the development closely, as the implications could be a Facebook that is one step closer to becoming the next Google, and a FB stock on pace to be the next GOOGL.
As of this writing, Brian Nichols did not own any of the aforementioned stocks.
