Facebook is a Buy Due to Two Million Active Monthly Advertisers

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By Jacob Maslow

facebook_desktopWhen looking at online content platforms, like Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB), you have to always remember that the primary way these companies make money is advertising. They sell advertising space to other businesses who are trying to reach consumers who use these platforms. Pretty straightforward business-to-consumer play. I’ve advocated in earlier posts that Facebook and to a lesser extent, Google, should look into business-to-business opportunities. Such opportunities are more sustainable. They also have a longer service life, and they have a higher return on investment.

From a purely business-to-consumer perspective, investors should pay attention to Facebook’s current number of monthly active advertisers. According to Facebook’s figures, that number has reached 2 million active advertisers. That’s a huge advertising base. Moreover, it’s reflected on the amount of revenues Facebook is experiencing. Between 2013 and 2014, Facebook’s total share of the global digital advertising market went up to 7.8% from a previous 5.8%. Compare this with deterioration in the advertiser share of Google. Google went to 31.1% from a previous 33.6%. This is a tremendous advertising base acceleration for Facebook. It really shouldn’t surprise people. Facebook has a lot of web advertising inventory. Also, it is highly targeted. Once people login, Facebook is pretty much tracking your every move. It’s paying attention to the content you consume. That Facebook “Like” button? It’s not there just because Facebook has nothing better to do. When you click that “Like” button, you are sending signals to advertisers as to your preferences. This increases the likelihood that you will be shown advertising that would actually personally connect. For all these reasons, it may be a good idea to look at Facebook as a growth stock.

However, you need to look at other factors. You need to look at the user burnout rate. While advertisers have woken up to the advertising potential Facebook brings to the table, this only makes the issue of user erosion, especially from developed countries, even more crucial. If Facebook continues to subsidize lower advertiser value users from the developing world due to advertising revenues from developed countries, it may reach a point where sustained erosion of Facebook users from developed countries might lead to a serious cash crunch down the road. Keep in mind that while advertisers are crazy about Facebook right now, this is not permanent. If Facebook doesn’t deliver highly lucrative traffic pools to the table, all that advertising interest can evaporate overnight.

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