In a report on Facebook Inc (NASDAQ:FB), analyst Carlos Kirjner from Bernstein Research has raised 2014 estimates and price target following strong second quarter 2013 earnings. Bernstein Research has raised its price target to $35 and has maintained a Market Perform rating for Facebook.
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Facebook News Feed ads a savior
Facebook Inc (NASDAQ:FB) rolled out News Feed ads towards the end of the second quarter of 2012 and advertising average revenue per user has surged in all geographies. The report says that average revenue per user (ARPU) growth was declining rapidly towards the end of 2011 and in the first half of 2012, but News Feed ads came in as a savior.
In the third quarter of 2013, ARPU is continuing to grow globally, and Facebook is monetizing their user (mobile) newsfeed. Analysts at Bernstein admit that ARPU growth in Facebook was due to surge in the number of News Feed ad impressions at a faster rate in the second quarter of 2013 compared to the first quarter of 2013 or fourth quarter of 2012. The second reason was noted to be inflation suffered by CPC beyond the seasonal effect.
North America saw strong escalation in ARPU growth in the second quarter of 2013 and the region tends to be the highest contributor of ARPU and revenue to Facebook. Bernstein’s report says it is difficult to estimate the share of News Feed in total revenue with high confidence as it depends upon the rate of change of business and how much information is accessible but approximately News Feed impressions contributed 5 percent of total North America ad impression, in the second quarter of 2013.
Newsfeed ad impression growth expected to decelerate
During the earnings call, Facebook Inc (NASDAQ:FB) indicated that there will be a decline in the growth of News Feed ad impressions and it will target better ad performance and increased competition in its auctions in order to drive pricing growth.
Mark Zuckerberg said, “Now that said, in recent studies, people have told us that they noticed the ads more, so we’re going to invest more in improving the quality.”
Some growth rates not sustainable
Looking at numbers of ARPU growth in different regions, North America has outperformed Europe and Asia in growing News Feed impressions. However, what has fueled this growth – demand or supply constraints of Facebook – is not clear.
The report indicates that there was an increase in Facebook’s revenue due to the rapid increase in the ad impression and this growth rate might not last for long. CPC support of Facebook in the second quarter of 2013 was due to new advertisers in the first half of 2013, and the same growth or support will probably not be sustainable in the long run.
Analysts expect that mobile app installs will be one of the main drivers of growth for Facebook Inc (NASDAQ:FB) in the near term but this also may not be sustainable. However, over the next one to three months, mobile app install ads and revenues may increase at a rapid rate.