Facebook Inc (NASDAQ:FB)’s average price per ad has been rising rapidly, which is certainly a good thing. But many investors question whether growth in this area is sustainable—particularly because most types of Internet ads have not sustained their pricing power. However, Nomura analysts Anthony DiClemente and Ron Zember are so sure that Facebook will be able to keep its pricing power that they’ve raised their estimates—and price target—for the company’s stock.
Mix shift or price per ad to drive growth?
The Nomura team sees a number of upside for Facebook Inc (NASDAQ:FB) and say that many investors have been asking “if forward price increases” at the social network will receive more benefit from a mix shift or growth in price per core ad. They think the answer is actually both. In addition, they see even more potential ad growth in a mix shift to mobile for both revenue and ad impression.
Tiger Legatus Master Fund was up 0.1% net for the second quarter, compared to the MSCI World Index's 7.9% return and the S&P 500's 8.5% gain. For the first half of the year, Tiger Legatus is up 9%, while the MSCI World Index has gained 13.3%, and the S&P has returned 15.3%. Q2 2021 hedge Read More
They also see pricing power in Facebook’s News Feed ads because of a number of unique characteristics. Not only does Facebook Inc (NASDAQ:FB) offer advertisers tremendous reach, but they can also be targeted carefully to consumers. In addition, the social network has now rolled out video ads.
Where Facebook especially benefits
They note that Facebook Inc (NASDAQ:FB)’s average price per ad has sped up in each of the last four quarters, hitting a 92% year over year increase in the fourth quarter. The reason they see the company’s ad offerings as being different is because they are not in infinite supply, as other Internet ads tend to be.
They also note that as of the fourth quarter, mobile advertising made up 53% of Facebook Inc (NASDAQ:FB)’s total advertising revenue. They estimate that it made up less than 10% of the company’s total ad impression, which means it is “well underindexing the revenue split.” They expect mobile ads to make up 80% of Facebook’s ad revenue by 2016, which means that the mix shift toward mobile could remain a tailwind for further blended pricing growth over the next few quarters.
Facebook also benefits from targetability
While the Nomura team does note that supply of Facebook Inc (NASDAQ:FB) ads has been increasing, they also say there’s pricing power in the company’s core News Feed ads because of targetability. They believe advertisers will see more value in the high level of targetability on Facebook, which should push ad prices higher and higher while also narrowing the gap between the company’s ad prices and those on traditional TV.
They’re modeling News Feed ad cost per impression at between $3.50 and $4, which is still a 70% to 80% discount to TV ad prices for prime time spots. In addition, standardizing the News Feed ad format makes it easier to buy them, while personalization makes News Feed ads feel “native to the user.”
Facebook rolls out premium video ads
Of course Facebook Inc (NASDAQ:FB)’s new premium video ads offer even more pricing upside. The social network introduced those auto-play ads this week, and again, they see the pricing on these ads as closing the gap between the price of Facebook ads and TV ads. The Nomura team notes that Nielsen measures these ads and that they are bought in a fashion similar to how TV ads are bought, which is using total gross rating points. This similarity should make the transition from TV to Facebook a bit easier for advertisers.
Nomura reiterated their Buy rating on Facebook Inc (NASDAQ:FB). Shares declined more than 1% in trading today.