Facebook Inc (NASDAQ:FB) is worth $24.74, according to a new report from Trefis. Shares of the social media giant closed at $28.26 in Monday’s trading session. Trefis as always has some insightful research. We focus on Facebook’s text and display advertising revenue in this article.
The Text & Display Ads division constitutes 70.8% of Trefis’ $24.74 price estimate for this stock, based on our sum of the parts analysis.The most important drivers for the Text & Display Ads business are:
Facebook’s Revenue per Page View (RPM)
Facebook’s Average Monthly Unique Visitors
Page Views per User per Month on Facebook
Text & Display Ads Gross Margin
— FACEBOOK’S REVENUE PER PAGE VIEW (RPM) —
Facebook’s Revenue per Page View (RPM) represents the average text and display advertising revenue that Facebook earns for every 1000 page views of facebook.com, which is dependent on prevailing ad rates, the number of ads shown per page, the type of ads used and the nature of the ads.
Text and display advertising on Facebook is based primarily on two types of online ads generally used in the ad
industry: CPM (impression-based) and CPC (click-based). CPM or Cost per impression represents the average of the amount bid by an advertiser for 1,000 impressions of an ad, while CPC or Cost per Click represents the amount bid by an advertiser when using click-based ads on Facebook.
Facebook’s Revenue per Page View (RPM) stood at around $0.81 for 2007. This number declined to around $0.29 in 2011, or approximately 65%. The decline came about as page views per user values skyrocketed on an yearly basis. While this meant higher engagement levels, the increase in page views may have been happening on mobile devices, where advertisers do not run advertisements as of 2011. This was also a result of higher ad inventories, which put downward pressures on cost-per impression (CPM) rates.
However, Trefis expects Facebook’s Revenue per Page View (RPM) to show a modest increase going forward.
Forecast Rationale Supporting:
FACEBOOK AGGRESSIVELY PUSHING HIGHER MONETIZATION – Since late 2011, Facebook has been seeking new sources of monetization on its website. One example is Facebook’s “frictionless sharing” concept, which has enabled articles from publishers like The Washington Post to be shared automatically with friends. These pages provide an additional opportunity to carry out an ad-sharing deal with the publisher, thereby increasing RPM rates. The company is also in discussions with Vevo to possibly strike a video-ad sharing deal with the latter. This could be important for the future, since currently Facebook does not have sufficient high-quality videos to allow for any video-based advertising.
FUTURE GROWTH LIKELY TO BE DRIVEN FROM LOW MONETIZING INTERNATIONAL MARKETS – As of Dec 2011, almost 79% of existing Facebook Inc (NASDAQ:FB) users are from outside North America. The rapid Facebook growth in countries such as Indonesia (annual growth of 2,000%) and Argentina (annual growth of 1,000%) indicates that the mix of international users is likely to increase. Facebook has started to take hold in the Asia-Pacific region and is quickly growing in popularity in Eastern Europe and BRIC region. Although international regions are experiencing phenomenal growth, the low monetization opportunities due to lower rates can depress the Facebook’s Revenue per Page View (RPM) for the forecast period.
INCREASE IN MOBILE ADVERTISING – Facebook Inc (NASDAQ:FB)’s mobile products had around 425 million MAUs (monthly active users) by the end of Dec 2011. For now, these products are not generating any meaningful revenue for the company, since Facebook Inc (NASDAQ:FB) does not show ads on its mobile products as of now. The global mobile advertising market is expected to grow from around $3.3 billion in 2011 to around $32 billion in 2017. This strongly indicates that the company would start running text/display on its mobile-based products in future as well. However, monetization rates on mobile devices have traditionally been lower, and as Facebook Inc (NASDAQ:FB) mobile usage rivals its PC usage in future, low RPM levels on mobile can reduce the company’s overall RPM.