Facebook primarily competes with Google (
GOOG
), Yahoo (
YHOO
), Microsoft (
MSFT
) and AOL (
AOL
) in the display and search advertising markets. Below we
highlight three key trends that will go a long way towards driving
Facebook's value in the years to come.
We currently peg Facebook's intrinsic value at $45
billion
.
Better Demographic Targeting
We estimate that text and display ads are the most valuable
business for Facebook, making up roughly 60% of
our estimated value for the company
. Facebook's revenue per page view (RPM) declined from around $0.58
per 1,000 page views in 2006 to $0.38 per 1,000 page views in
2009. However, RPM rebounded back towards $0.45 in 2010, and we
expect further growth towards $0.54 per 1,000 page views by the end
of our forecast period.
Facebook allows for targeted advertising based on user
demographics. Better demographic targeting will increase click
through rates and prompt advertisers to bid higher to ensure that
their ads are displayed to the proper users.
Facebook Credits Could Enable More User Spending
Facebook's virtual currently allows users to purchase virtual
goods in games like FarmVille and Mafia Wars. It provides a more
seamless mode of payment on the platform than either credit card or
eBay's (
EBAY
) Paypal.
During 2010, Facebook Credits became the exclusive payment
method for most of the games created by Zynga, the #1 developer of
Facebook applications. Recently, Facebook has made it
mandatory for games developers to utilize this virtual
currency.
By sparing users the hassle of constantly having to enter their
credit card or Paypal information, these initiatives should help
raise user spend on games and applications. We anticipate growth
from around $0.8 in 2010 to $2.6 by the end of our forecast
period.
Growing Search Activity on Facebook
Five years ago, who would've thought that Facebook would become
a legitimate challenger to Google, Yahoo, or Microsoft in the
search advertising market? The scenario has become reality and
Facebook is rapidly gaining market share in search - it has already
overtaken AOL in quantity of searches. Although it is still
difficult to pinpoint Facebook's growth potential in the search
business, we anticipate steady market share improvement in this
space. We currently project that Facebook's search market share
will grow from 1.8% in 2010 to around 5.6% by the end of our
forecast period.
See our full analysis and $45 billion valuation
estimate for Facebook
Facebook makes its money primarily through display
advertising, but also facilitates the purchase of virtual goods
in games and applications running on its platform through
Facebook Credits, a virtual currency. It also generates a
significant number of internet search queries and earns search ad
revenues as a result.