) shares have risen by roughly 30% in 2014 alone, further
dispelling investor concerns that had plagued the stock in 2012.
The growing digital advertising market, the increasing share of
mobile in the mix, the attractive return on investment for
businesses advertising on Facebook, and the company's investments
in optimizing its ad strategy are some of the factors that have
fueled its increased valuation. That said, Facebook entails the
risk of being priced too high as the current market multiples
suggest. In this analysis we focus on broad factors that are
driving the company's stock and will follow up with another note
discussing key risks that investors need to be aware of.
Our current price estimate for the company stands at
, implying a discount of about 35% to the market price.
See our complete analysis for Facebook
Growing Digital Advertising Market
The digital advertising market is growing globally, and has
already reached roughly 24.5% of total media ad spending in the
U.S. According to a report published by research firm eMarketer,
overall media ad spending in the U.S. stood at an estimated $158
billion in 2011 and is expected to reach $197 billion by 2017,
growing at an annual rate of roughly 3%-4%. In contrast, the
digital ad market is expected to grow in double digits. A
significant portion of this growth will come from mobile where
Facebook has a strong presence. According to a December 2013
report, mobile platform accounted for roughly 22% of U.S. digital
ad spending in 2013 compared to less than 3% in 2010. Internet
companies such as Facebook, Pandora, Google, Twitter and LinkedIn
have ramped up their mobile ad businesses significantly in the last
year and a half.
Facebook's Growing Market Share
While Google has long dominated the digital advertising market,
Facebook is emerging as new key player and has played a vital role
in the overall industry growth. Facebook's share in total U.S.
digital ad revenues stood at 5.9% in 2012. This figure jumped to an
estimated 7.4% in 2013 and is further expected to reach 9% in the
next two years. There is no doubt that Facebook has mastered the
art of mobile advertising by making its ads a natural part of the
content feed. The return on investment (ROI) for marketers has been
very high on Facebook as compared to other platforms, and the
company has successfully attracted millions of small business to
market themselves on its platform. More than 25 million small
businesses advertise on Facebook now. As a result, the company has
registered a massive increase in its average ad pricing in recent
quarters. In Q4 2013, the figure demonstrated year-over-year growth
of 92%. These factors will continue to drive Facebook's share of
the overall digital advertising market.
Possible Symbolic Effect Of Whatsapp Purchase
When Facebook announced Whatsapp's acquisition, it appeared that
the company bought a potential competitor, and in the process
rectified its failure in the mobile messaging market. Its Facebook
Messenger service hasn't garnered much attention and WhatsApp, by
far, is one of the most popular and fastest growing messaging apps
in the world. In addition, there are young users who use WhatsApp
but not Facebook. This offers the company an opportunity to further
consolidate its position globally and monetize this untapped user
base. We also believe that mobile messaging is here to stay, even
though the growth in the social networking industry might slow
down. This is because mobile messaging enables a very basic human
need - the desire to communicate with friends day-to-day in a
convenient manner. In some ways, Facebook may have acknowledged a
weakness in its business as it looks into the future, and is
attempting to plug that gap through the acquisition of WhatsApp.
The market may have rewarded this to a certain extent.
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