Thursday, October 30, 2014

FB Stock: Facebook’s Still Building

Facebook185 FB Stock: Facebooks Still Building
Facebook's Q3 earnings report reinforces analysts' long-term buy recommendations.

Facebook (FB) reported mixed third-quarter earnings Tuesday, with most areas barely beating the Street’s expectations and only a few falling short. However, despite a resulting 6% drop in FB stock, the company’s overall performance was very strong on a year-over-year basis.

Importantly, the social media giant continues to make strides in several key areas to improve mobile advertising, and those investments will secure FB’s position as a long-term market leader.
Net income for the quarter was $806 million, or 30 cents per share, falling short of analyst expectations by almost 7%. Revenue for the quarter exceeded expectations by 2% and was $3.2 billion — up 59% from $2 billion in the year-ago quarter and 9% from the $2.9 billion in Q2. Total ad revenue accounted for $3 billion of that, a 64% increase over last year.

And mobile was the primary growth driver, as mobile ad revenue for the quarter was $1.9 billion, or 66% of the total.

The average price of an ad on Facebook increased 274% compared to the same quarter last year, and total ad impressions fell by 56%, which stemmed from the company’s redesign of the site’s right-side column to accommodate larger image ads. The plan seemed to have worked, as desktop ad revenue was up 11% over last year.

However, one of the company’s primary areas of focus going forward is mobile advertising and making ads more relevant.

Solving the Mobile Advertising Problem

According to COO Sheryl Sandberg, the advertising industry is not keeping up with the increasing shift to mobile. She went on to explain that 2013 was the first year the average American adult spent more time on digital media than watching television, and 25% of that time was with a mobile device. Yet, advertisers typically only spend about 11% of their budgets there, mainly because they haven’t had an effective way of delivering ads and tracking progress.

The demographic targeting of digital ads is less than 60% accurate across the industry, but Facebook is positioning itself to improve this statistic with the re-launch of its ad server, Atlas. Regardless of the actual device used by members, Atlas will help advertisers deliver more relevant ads to the proper demographic. Sandberg boasted, “Facebook’s age and gender targeting is 45% more accurate than the digital industry average.”

Competing with Google (GOOG), which has a market share roughly three times the size of Facebook’s, will become easier as more advertisers realize the power of delivering the right targeted ads to users with multiple devices. Facebook’s strategic investments in long-term ad tech improvements, like Atlas, may reduce short-term revenue, but should help solidify the company’s position as a top destination for advertisers.

In addition to the FB website, improving and monetizing individual services like Instagram, Messenger and WhatsApp is one of the company’s primary five-year goals. Ads are slowly rolling out on Instagram, which has experienced more than 100% year-over-year growth in some countries. According to Mark Zuckerberg, Chief Executive Officer, people spend an average of 21 minutes on Instagram every day. As the type and frequency of ads on the platform continues to increase, bringing over the 1.5 million advertisers currently on Facebook will improve the company’s continually increasing ad revenue going forward.
Virtual Reality is the Future of Computing

Looking much further into the future, Zuckerberg explained his belief that the future of computing will undoubtedly revolve around virtual and augmented reality. He stated that more than 100,000 Oculus Rift developer kits were shipped to 130 countries last month, and preparing for the eventual shift to VR computing platforms will require aggressive investing in related technology.

Facebook’s $2 billion acquisition of Oculus earlier this year puts the company at the forefront of the virtual reality space. Currently, Sony (SNE) is the only notable competitor with its Project Morpheus headset, but Samsung (SSNLF) has also been working on its own device, although software seems to be the major roadblock for the Korean electronics giant.

Bottom Line

Overall, Facebook’s third-quarter earnings report contained nothing dramatic or overly exciting, but it served to reinforce the notion that this is a great stock for long-term portfolios, particularly for investors with an affinity for cutting edge technology.

As the industry evolves and reacts to the continued decline of desktop computer use, companies with a strong platform for monetizing mobile advertising will come out on top, and Facebook looks set to be one of the dominant players in that future.

As of this writing, Greg Gambone did not hold a position in any of the aforementioned securities. 

See the original article on InvestorPlace.com (10/30/2014)