3 Key Drivers for Growth at Facebook

Facebook (NASDAQ: FB  ) posted its fourth-quarter earnings this week, and the results were heavily boosted by strong mobile advertising revenue. Meanwhile, Google (NASDAQ: GOOGL  ) has been dragged down by the shift to mobile, resulting in a declining cost-per-click. Twitter (NYSE: TWTR  ) competes with Facebook for mobile marketers, and its shares rose with Facebook's strong results.

Surely, Facebook now considers itself a mobile company. But COO Sheryl Sandberg was keen to point out on the conference call that there are three things driving Facebook's business, and only one of them is mobile-centric.

Mobile engagement
Everybody's talking about mobile, and for good reason. Mobile advertising grew to $1.25 billion in the fourth quarter, accounting for 53% of total advertising revenue. Additionally, daily mobile users grew to outnumber daily desktop users for the first time in 2013.

What's more interesting, is that Facebook is facilitating engagement on mobile devices much better than Google. In other words, users are looking to Facebook as a source of information before they make a decision -- in particular, shopping decisions. This creates obvious value for marketers, and Facebook was rewarded with a 92% increase in ad prices year over year in the fourth quarter.

This trend will continue driving mobile ad revenue for Facebook as one of the hardest parts about advertising on mobile is facilitating commerce. If people are already shopping or planning to shop when they check Facebook, advertisers are going to see a higher ROI on Facebook than other mobile platforms like Google or Twitter. Facebook is working on measuring the effectiveness of its advertising on in-store sales to help marketers understand the value of its platform.

Growing number of marketers
Facebook's ad impressions actually declined 8% year over year in the fourth quarter. Comparatively, Google increased its ad-clicks 31% year over year. So, while Google is increasing its revenue by increasing its ad impressions, Facebook is allowing an increasing number of marketers to bid up the price per ad.

The company has four marketer segments, but I want to focus on just two of them: small-to-medium businesses, or SMBs, and app developers.

Facebook has a huge advantage over its competitors when it comes to the valuable SMB market. In the last quarter, it added 5 million SMB pages, surpassing 25 million. As it brings more SMBs online, Facebook is positioned to win the advertising war versus the competition.

In fact, a recent study by Cowen & Co. found that Twitter is particularly bad at attracting smaller advertisers. Minimum ad spends are quite high, and the cost-per-click was found to be four times higher for a Twitter campaign compared to a simultaneous Facebook campaign. Pressure from Facebook may cause Twitter's CPC to fall in the future.

Facebook has also found success with its app-install ads and its more recent app-engagement ads. These ads work well because they have clear objectives, and they advertise where the market is -- mobile. The category remains small, but it's growing very quickly. Additionally, Facebook began testing ads in third-party mobile apps last week as a means to expand its mobile advertising business.

Facebook has a ton of opportunity to continue increasing the number of marketers it engages with.

Product development
It's not enough for Facebook to play supply and demand games with its platform. At some point, marketers will go elsewhere if they don't feel they're getting fair value from the increasing ad prices. That's why Facebook continues to invest in product development like the example I gave earlier about tracking in-store sales.

Facebook's end goal is to utilize its vast personal information on its users to allow marketers to personalize their messages. This includes products like custom audiences, look-a-like targeting, and partner categories. These products allow for specific targeting by marketers, and allow them to find new potential customers.

As Facebook's ads grow more effective, advertisers will be willing to spend more on Facebook's limited ad space. There's almost no limit to the amount of fine tuning Facebook is capable of, so ad rates should continue climbing as individual advertisers spend more to target a more specific audience.

Finding growth isn't hard
Facebook is the best positioned company to take advantage of the growing number of mobile Internet devices. As Sandberg put it, "when [people are] on their phones, they're on Facebook." But the company doesn't rest on its laurels. It's improving its product and attracting customers much better than Google or Twitter, and as a result its seeing revenue growth from higher ad prices and not an increase in ad clicks.

If at some point the company finds an upper bound to its ad prices, it can test the boundaries of its ad volume. Until then, however, Facebook ought to continue delighting investors and customers with its advertising products.

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