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A Case for Facebook – Elgin Group

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A Case for Facebook – Elgin Group

It’s Facebook Time.
Following a terrible year for those that bought the company at its IPO price, it’s time now to be bullish on this company. They have proven that they have a plan and that they are executing. It is tough to find a smartphone or tablet without the app on the first page. Often times, that app is open.

Some facts courtesy of Forrester Research and others:
• Roughly 469 million people check their Facebook from a mobile device daily.
• Around 819 million do monthly.
• In its latest quarterly report, Facebook said that they generated 41% of total ad revenues via mobile. That’s pretty impressive considering they generated almost nothing from it at the end of 2011 when they had already 432 million mobile monthly users.
• Since the launch of mobile ads in 2012, Facebook has steadily increased the share of mobile in total ad revenues: it was 23% at the end of 2012 and 30% in Q1 2013.

There is still a monetisation gap in comparison to the share of their mobile audience, but these are definitely impressive numbers for a new product. There are a couple of reasons for this sharp increase. Time spent on Facebook is meaningful. Facebook’s mobile ads integrate well in the natural flow of Facebook’s news feeds. They are quite visible and are increasingly successful at driving mobile app installs. According to Technographics Consumer Technology Online Survey, Q4 2012, 16% of online adult smartphone owners (ages 16-plus) who use apps report that they first learned about an app via social networking websites such as Facebook. Cost per click increased despite a lot more clicks and ads shown.

With all this ad bombardment, how are the users perceiving this? According to Facebook, user satisfaction had not been significantly impacted and that ads only represent one in 20 stories on the newsfeed (5%).

It will be key to advertising revenue success to quickly monetise its audience in emerging countries. A growing number of Facebook’s mobile audience is coming from developing countries like Indonesia, Malaysia or the Philippines. Facebook announced they had more than 100 million users using their app designed for simple mobile phones. The majority of their mobile audience is actually not US-based but for now it is probable that a good chunk of the mobile ad revenues are to come from US marketers.

This transition will be key to close the monetisation gap as well as Facebook’s ability to maintain the price of their mobile ads.

Games Attack
Facebook is opening up its games ecosystem even further. Facebook launched a new discovery system so newer and smaller game developers can gain exposure.

Through Facebook Mobile Games Publishing, a pilot program which will help developers grow on mobile, Facebook will help small and medium-sized developers by promoting their games across the company’s mobile apps. By having a more open games ecosystem (which was previously dominated by Zynga), Facebook has found an enhanced revenue stream, as payments from game developers have grown steadily.
Facebook Software Engineer Victor Medeiros announced the news in a blog post:

All in all, Facebook has now become an attractive buy with excellent prospects for the next couple of years. This should be reflected in its stock price. Our 2-yr target is $60, for a potential gain of 33% from today.

• Of the 44 analysts following Facebook, 33 rate it as a “buy” and 11 as a “hold”, with no “sell” rating. Contrarians might feel uncomfortable. {Note we have found that analysts, like the herd, follow the stock trends rather than lead it}
• At an estimated P/E ratio of 62, many argue that the valuation is very rich, and earnings cannot catch up. {Note that Google traded at a P/E of 100 in late 2004, and the price has since gone up by a factor of 7}.

Elgin Group LLC
Neuhofstrasse 8
6340, Baar
Tel: +41 41 760 5442
Fax: 41 41 761 9225
Email: [email protected]
Elgin Group Website click HERE

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