For the first time in its history,
Facebook Inc.
(
FB
) started distributing ads on other websites, a clear move toward
building an online ad network. The social networking company
recently started showing ads on social game developer
Zynga's
(
ZNGA
) website.
Zynga players are required to use their Facebook accounts to
enter Zynga.com. The ads will target the users who have already
shared their details with Facebook. However, Facebook said that it
will not share these details (of both users and advertisers) with
Zynga.
The ads include sponsored stories and other formats that
Facebook displays on its own website. The company said that the ads
do not involve any "new targeting criteria" from advertisers and
are similar to the ads shown on Facebook.com. Currently, the two
companies have an ad revenue sharing agreement in place, signed in
2010.
Facebook earned 82.0% of its first quarter 2012 revenue from
ads. However, slowing ad revenue growth coupled with lack of
visibility around monetization of mobile platforms has been a
concern lately.
Moreover, automobile maker
General Motors
(
GM
) decision to drop paid ads and questioning about the effectiveness
of Facebook ads compared to
Google's
(
GOOG
) AdSense further aggravated the situation.
In such a scenario, distribution of ads beyond Facebook.com will
provide a much-needed impetus to Facebook's monetization efforts in
our view. Moreover, Zynga has a strong mobile user base, which will
further improve Facebook's monetization prospects.
We believe that Facebook will continue to distribute ads to
third party websites, thereby building an ad network that is
similar in concept to AdSense. Currently, Google is the leading
provider of online ads and it will be difficult for Facebook to
displace it in the near term.
Nevertheless, Facebook's massive user base (around 900 million)
and its ability to track personal details over time make it a
formidable force in the online ad market. Facebook can use this
massive database to help advertisers target relevant ads going
forward.
Moreover, we believe that Facebook will continue to earn
significant non-advertising revenues from third party developers
and through the sale of Facebook Credits (a form of virtual
currency) going forward.
We remain Neutral over the long term. Currently, Facebook has a
Zacks #3 Rank, which implies a Neutral rating over the short term
(1-3 months).
FACEBOOK INC-A (FB): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis
Report
ZYNGA INC (ZNGA): Free Stock Analysis Report
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