Can Facebook Monetize Ad Growth?

Mark-ZuckerbergFacebook celebrated a major milestone last month when it announced it had surpassed 1 billion monthly users, launching its first brand campaign to mark the occasion. That remarkable achievement, however, made little impression on Wall Street, which is focused on how well the company can monetize its immense audience -- especially on mobile devices.

Following its rocky IPO and disappointing revenue growth in the second quarter, Facebook’s stock continues to languish at about half its opening price of $38 a share in May. With its third-quarter earnings scheduled for Tuesday, analysts on average expect Facebook to report revenue of $1.23 billion and profit of 11 cents per share.

That would represent a 29% revenue gain from a year ago, down slightly from the 32% increase in the second quarter. The quarter-to-quarter revenue increase of 4% would also be a drop from the 12% gain in the second quarter. To rev up slowing sales growth, Facebook recently rolled out a barrage of ad and e-commerce initiatives.

These include the expansion of Sponsored Stories to the mobile news feed; the launch of Facebook Exchange for retargeting users based on their Web activity; Custom Audience ads for targeting users via email addresses and phone numbers; search advertising; mobile app ads; and the ability for people to pay $7 a pop to promote their own posts

On the e-commerce side, the company recently introduced Facebook Gifts for sending physical items to friends on the social network, and Facebook Collections -- a feature that allows brands to showcase product images, which users can "Like," "Want," or "Collect," and eventually buy directly through Facebook.

For analysts and investors, the biggest concern has been whether Facebook’s ad efforts can catch up with the rapid shift of users from the desktop to mobile devices. Some 600 million of its 1 billion users are now accessing the social network on their phones. CEO Mark Zuckerberg said building the mobile business will be central to the company’s success.

Facebook has said its Sponsored Stories ads are performing better than standard display ads running on the desktop and were bringing in about $1 million a day when launched in the last quarter. The third quarter will be the first full quarter running Sponsored Stories in both the mobile and desktop news feed, providing a better window into results so far.

Analysts will also be looking for early insights on the Facebook Exchange (FBX), which launched in June and officially came out of beta in September. JPMorgan analyst Doug Anmuth suggests that FBX could be a “multi-billion opportunity over time,” but like many of Facebook’s batch of new ad products, it’s still too nascent to have a significant impact on third-quarter earnings.

Facebook, however, may be feeling the effects of Zynga’s recent financial woes. The company behind games including “FarmVille” and “Words with Friends” has long been key to Facebook’s payments business and accounted for about 9% of its total revenue in the second quarter. Mainly because of Zynga’s problems, Anmuth expects Facebook payments business to shrink by 28% to $582 million in 2013.

In addition to any fallout from Zynga’s problems, Brian Wieser, senior research analyst at Pivot Research Group, suggested that small advertisers and endemic Web marketers “may be becoming increasingly focused on optimizing their broader social media presence in ways which do not involve paying Facebook directly for media."

Still, Wieser projects Facebook’s Q3 results roughly in line with the consensus analyst estimates -- at $1.225 billion in revenue, with $1.04 billion of that in ad revenue.


3 comments about "Can Facebook Monetize Ad Growth?".
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  1. Jill Kennedy from Manka Bros., October 22, 2012 at 8:32 p.m.

    I think the biggest issue Facebook has to deal with isn't earnings - it's that it has become irrelevant. And that is something it will not be able to overcome.

  2. Ross Bradley from Qeg Pty Ltd, October 23, 2012 at 10:09 a.m.

    From a growth in revenues point of view (in reply to Jill Kennedy from Manka bros), I think you have it all wrong about Facebook.

    There are a number of ways that a user's purchase intent can be found and marketed and Facebook (with it's 200M members - who have 5 accounts each) can provide Facebook's own analytics with so much '1st party' intent data, that it ain't funny.

    I believe that Facebook will shortly announce the purchase of a small ad network - one that will give Facebook advertising a 'double-play' (from both an advertiser and as a publisher POV), in what appears to be a successful and growing marketplace - a global CPC/CPM marketplace that's based soley on 'user intent'.

  3. kevin lee from Didit / eMarketing Association / Giving Forward, October 23, 2012 at 11:04 a.m.

    If FB can retain the eyeballs they have plenty of time to experiment with monetization that balances the user's preferences and desires with the advertiser's desire to deliver influential messages to the user.
    Google has actually recognized that in some ways social may be stickier than search which is why Google+ is a huge priority for them.

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