Facebook's mobile wild card

The social network's ad revenue is still relatively young, and it's likely to steam ahead as it begins to roll out advertising for the site on mobile devices.

The question of whether Facebook represents a good investment or not comes down to a simple question: how fast do you think they can grow revenue per user over time? And the biggest factor to consider in answering this is what you think they can do in the mobile space.

Based on a quick scan of some of the numbers, it looks like Facebook revenue is growing more than twice as fast (88 per cent) as users (roughly 39 per cent). You'd expect this given that audience always grows ahead of revenue in advertising businesses, and tends to catch up over time. In order for it to be worth close to $US100 billion though, there's a lot of growing to do – revenue in 2011 was $3.7 billion and profit $1 billion.

User growth will slow. Based on my rough maths, monthly active users in Facebook's most mature market (US and Canada) were up about 16 per cent on a December 11 versus December 10 comparison; Europe about 25 per cent; Asia about 54 per cent – it's the 'rest of world' category that has the fastest growth at 69 per cent. Generally advertising is most valuable in richer countries, and so the users they are adding are likely over time to be less valuable than the ones they already have.

However, in richer markets the Facebook advertising proposition is still relatively young, and will become more sophisticated and better targeted over time, which will tend to improve revenue per user. So it's probably reasonable to expect solid revenue per user growth as the advertising product gets better, and as online advertising continues to take share from traditional media.

The wild card here (and in my view the best reason for believing that you should buy the stock if you can) is mobile. Of the 845 million monthly users Facebook reported in December, 425 million accessed the site on mobile devices. At present there are no ads on Facebook's mobile sites or services. So, first of all, there's very clear upside as they develop and roll out mobile advertising solutions for the maturer, richer markets based on a combination of individual preference data (user tastes) and specific location information. Second, mobile advertising in many of the faster developing economies will offer reach that PC internet cannot.

In Asia and Africa there are very large numbers of consumers who will never own a laptop computer, but already own a mobile phone. As Facebook develops mobile ad solutions it effectively helps open up ad markets that have previously not existed. Although they are likely to be low-yielding, their volume will be massive.

So although there are limits to user growth, in particular in the oldest markets, there are yield growth opportunities as Facebook's ad offering matures, and total upside in mobile, which make the company look really interesting.

Tony Faure is a director of Australian Independent Business Media Pty Ltd, which owns Business Spectator, and is former CEO of ninemsn.

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