Facebook Inc. Is Growing Up

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It wasn't long ago there were concerns about how Facebook (NASDAQ: FB  ) would continue its stellar top-line growth. The fear, and it was a legitimate one, was that Facebook users would get inundated with a tidal wave of advertisements. It's a fine line, balancing the need for revenue growth to placate shareholders, without undermining the Facebook experience and alienating users.

As it turns out, CEO Mark Zuckerberg had other plans for continuing Facebook's outstanding growth that didn't require more ads, and based on some recent data, it appears those plans are working even better than expected.

The plan
Zuckerberg's objective of turning Facebook into a mobile giant is working in a big way, but it's the speed of the transition that's been truly impressive. Last year says it all: Of Facebook's 1.23 billion monthly average users at the end of 2013, 945 million were mobile -- a 39% jump from the prior year.

The end of 2013 also saw the introduction of Facebook's long-awaited video advertising alternatives. Just how big is video advertising? Some analysts estimate that Facebook will generate $8.4 billion in annual revenue from its video ads once they're up and running.

In addition, Facebook advertising works because of user data -- lots and lots of user data. The result is that Facebook is able to charge more for its ads, so overwhelming its users with an unending number of spots isn't necessary to continue growing revenues. Opting for quality over quantity is a success, for both Facebook and its users.

When a plan comes together
Traditional advertising is good, but long-term revenue growth is even more likely now that marketers view Facebook as more than an advertising machine. Facebook is becoming a primary tool for companies to build branding, public relations, and customer relationship management partnerships with consumers, and that changes everything.

As analysts from Stifel Financial's equity trading desk describe it, "marketers [now] view Facebook as a strategic communications platform, capable of establishing and reinforcing relationships with consumers." The result is that going forward, Facebook is expected to get an even bigger piece of companies' marketing budget.

And that's not all. With the change in how Facebook is being viewed, and utilized, by marketers, comes an ancillary benefit: Building long-term, profitable relationships with Facebook's ad clients. Driving a successful branding campaign, for example, requires a long-term commitment from a company. An ad running for a couple of weeks pushing the latest, greatest widget is nice, but that doesn't necessarily result in sustaining revenue growth over the long haul.

With the subtle shift in how marketers are using Facebook taking hold, particularly in conjunction with Facebook's emphasis on mobile users, incorporating video, and continuing to grow and utilize its mountains of user data, questions about Facebook's growth become moot. And that should have investors cheering, even after Facebook's extraordinary 151% jump in share price the past 12 months, nearly 28% of that coming this year alone.

Final Foolish thoughts
Concerns that Facebook will be able to maintain its upward user and revenue trends were certainly valid. But based on feedback from the folks who matter most when it comes to Facebook's growth -- the heads of large marketing departments -- the future is looking good for Zuckerberg and team. Yes, Facebook is trading at more than 114 times trailing earnings, but that shouldn't scare off investors. At only 41 times forward earnings, Facebook still makes a nice addition to most any mid- to long-term growth portfolio.

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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8/27/2015 3:59 PM
FB $89.73 Down +0.00 +0.00%
Facebook CAPS Rating: ***