3 Key Trends to Watch for Facebook

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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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AOL , EBAY , GOOG , MSFT , YHOO

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