Facebook Shines As Ad Growth, Mobile Use Look Solid

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Since its founding almost 10 years ago, Facebook has been on a mission to connect the world. Is it finally connecting with investors?

Nearly half the world's 2.7 billion Internet users have aFacebook ( FB ) account, but that's not enough for founder and CEO Mark Zuckerberg. Last week he announced the launch of internet.org , a partnership of several tech firms with a goal to make Internet access more available to the entire global population.

Despite the global friending frenzy already going on, Facebook has faced a big challenge in convincing investors it can get more profit from social networking, especially when it's done on mobile devices, a chief way much of the world goes online.


Sure, Wall Street was hopeful, but investors awaited proof that Zuckerberg's strategies could pay off.

Facebook seemed to have achieved that when the company posted second-quarter earnings on July 24 -- it beat expectations on all metrics. The following day shares rose 30%, and continued to climb to a level not seen since Facebook went public with a blockbuster IPO in May 2012.

Skeptics And Shares

Finally, Facebook stock in late July topped the IPO price of $38. It currently trades near 40. Since the company posted second-quarter results, Facebook stock has risen about 50% -- while its stature in strategy has smartened up.

"There were a lot of disgruntled investors after the IPO," said Martin Pyykkonen, research analyst with Wedge Partners. "Skeptics wondered if the business model would work. A lot of that was focused on the mobile market."

When Zuckerberg spoke on the conference call with analysts after earnings posted, the first thing he addressed was mobile.

"When it comes to mobile, I'm very pleased with the results," he said. "We now have more daily actives on mobile than on desktop -- nearly half a billion people use Facebook on their phones every day -- and soon we'll have more revenue on mobile than on desktop as well."

Mobile ad revenue grew significantly in the second quarter and is now approximately 41% of total ad revenue, up from about 30% in Q1. Facebook's advertising business overall grew 61% from the year-ago quarter to $1.6 billion.

The social network has 1.15 billion monthly active users, up 4% from the first quarter and up 21% from a year earlier.

Other stats that Facebook presented alleviated concerns analysts had, among them being Facebook fatigue. The concern is that users will tire of logging onto Facebook, and also move to other social networking platforms such asLinkedIn ( LNKD ), Google Plus fromGoogle ( GOOG ), Twitter, Pinterest and Tumblr (recently acquired byYahoo ( YHOO ), as well as Instagram, which Facebook acquired last year. Facebook also has been concerned about user fatigue.

"As more social services get created, one question is how that affects the sharing and time that people spend on Facebook," Zuckerberg said on the call. "You could naively assume that more new services mean people spend less time on Facebook -- but that isn't happening. In fact, people on average are spending more time on Facebook than ever before."

According to research by ComScore and Nielsen, time spent on Facebook in the U.S. is either steady or increasing "and we believe it's either steady or increasing everywhere else as well," he said.

More than 700 million people worldwide use Facebook on a daily basis, or 61% of all active users, and 72% in the U.S. market. In June, according to ComScore, users spent a total of 128 billion minutes on Facebook, up 26% from a year earlier.

"Competing services are having only a modest impact on Facebook," JPMorgan analyst Doug Anmuth wrote in a recent research report.

Second Quarter Surges

Facebook reported second-quarter revenue of $1.8 billion, up 53% from the year-ago quarter and its strongest revenue growth in six quarters. Earnings per share, minus items, rose 58% to 19 cents, its best performance in seven quarters.

Mobile advertising revenue of $656 million rose 76% from the first quarter. That increase made up for the 5% drop in desktop advertising revenue to $943 million.

The other portion of Facebook revenue, fees collected from social gaming and other services, rose 11% from a year ago to $214 million.

"This was an inflection point quarter," wrote RBC Capital Markets analyst Mark Mahaney, in a research report. "Facebook, over the past four quarters, has addressed and now likely defeated the biggest overhang issue from its IPO days -- mobile monetization."

Revenue In View?

One untapped source of potential revenue growth is Instagram. Facebook acquired it in April 2012.

Instagram, which has 130 million monthly active users, is a mobile photo-sharing application with relatively few ads. In the second quarter Facebook introduced Instagram Video, which lets users post online videos up to 15 seconds long.

The main reason for the recent revenue growth boost at Facebook is that ads have been introduced into the redesigned News Feed that Facebook users see when they log on. News Feed is the central element of a user's Facebook experience, where comments and photos from friends stream down the page.

Facebook has slowly but steadily incorporated ads into the News Feed, designing them to go with the overall flow. Historically Facebook put ads on the right side of the page, and still does. It is also planning to place video ads in News Feed.

"We expect News Feed ads to remain the main driver of revenue growth in the second half of the year," said Sheryl Sandberg, Facebook's chief operating officer, on the conference call. "And we believe we have a great opportunity to continue to drive long-term growth by improving the quality and relevance of these ads."

Facebook has a highest-possible Composite Rating of 99 from IBD. It is the second-largest company by market cap after Google in the Internet-Content industry group, which is currently ranked No. 8 of 197 that the newspaper tracks.



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

Referenced Stocks: FB , GOOG , LNKD , YHOO

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