2 Reasons to Keep Facebook on Your Watchlist

When it's all said and done, the social media giant is about ad revenue, and its clients are going to love hearing this!

Jan 16, 2014 at 6:00PM

Like its primary competitor Google (NASDAQ:GOOGL), Facebook (NASDAQ:FB) generates the vast majority of its revenues from online advertising. A quick look at Facebook's 2013 Q3 says it all: 90% of its $2 billion in revenues for the quarter came from advertising, the remaining 10% from "payments and other fees."

Granted, Facebook is working to diversify its revenue sources, as any good company will, but growth in the foreseeable future will depend on increased ad sales, and making a dent in Google's overwhelming mobile advertising market share. Tall orders for sure, but there's some new data that suggests Facebook can accomplish both.

Ad response data
Working in Facebook's favor as it attempts to keep its string of solid quarterly performances intact, is the knowledge that advertisers are willing and able to pay exorbitant fees, assuming they get results. Why else would advertisers line up, with checkbooks open, to pay an estimated $4 million for a 30-second spot in the upcoming Super Bowl? Because it works, and so does advertising on Facebook.

A measure of online advertising success, or lack thereof, over the recently completed holiday shopping season was released by Experian, and should delight Facebook bulls everywhere. Ultimately, successful online advertising means getting users to an advertiser's website, and Facebook ads are really, really good at accomplishing this sometimes difficult task.

Of the online traffic driven by ads to retailer's websites over the holidays, a whopping 5.32% came from Facebook; that's over three times more than Google's YouTube, which accounted for 1.65% of retailer's online visits. No one else was even close. And Facebook's incredible 5.32% return isn't the only compelling argument for advertisers.

According to Experian, Facebook was responsible for over half of all social referrals to retailer's websites. Facebook gets results for advertisers, and that bodes well for fueling growth moving forward. It should be noted that search still dominates in getting consumers to retailer's websites, with over 40% market share, and Google reaps the rewards. However, consumer's reliance on search is diminishing, as demonstrated by its 13% decline compared to Dec. of 2012.

Mobile data
As the dominant player in the mobile OS market, Google's Android has helped make it the runaway leader in generating mobile ad revenues. Research firm eMarketer estimates Google will capture about $8.85 billion of 2013's total mobile ad spending of $15.82 billion, equal to nearly 56% of the entire market. The only alternative to Google that's anywhere close is, you guessed it, Facebook.

How does Google's mobile ad dominance translate to a positive for Facebook? A quick look at Facebook's efforts in the mobile space, and the outstanding results it's already achieved, tell the story. In 2012, Facebook generated all of $470 million in mobile ad revenue. 2013? eMarketer estimates Facebook generated slightly over $2 billion in mobile ad sales for the year.

Not only should Facebook bulls feel warm and fuzzy over its rapid gains in mobile ad market share -- its $2 billion in 2013 is nearly 13% of the overall advertising spend -- with its mobile initiative still relatively new, already 49% of all Facebook's advertising revenues are mobile-related. That's phenomenal growth in a short period of time, with plenty of upside remaining.

Final Foolish thoughts
The results are in, and Facebook has a compellingly simple story to share with prospective advertisers: It works. Facebook's emphasis on growing its mobile business is also a success, and that's not likely to change anytime soon. Don't be surprised on Facebook's Jan. 29 Q4 earnings call to learn that the majority of its earnings come from mobile ads. The growth opportunities are there, and Facebook's ready to seize them.

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Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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