Facebook Inc. Can Raise Ad Prices, but Twitter and Google Can't

Facebook increased ad prices 92% last quarter. Can it keep it up?

Mar 11, 2014 at 12:00PM

Shares of Facebook (NASDAQ:FB) reached an all-time high on Monday after an analyst at UBS released a note increasing its price target to $90. The impetus behind the target increase is Facebook's ability to maintain ad price increases, something that has evaded Google (NASDAQ:GOOGL) as mobile users increase. Meanwhile, Twitter (NYSE:TWTR) continues to see its average ad rate decline as well.

What makes Facebook different, and can it keep up this breakneck rate of price increases?

Reviewing the fourth quarter
Facebook's ad prices increased a whopping 92% year over year in the fourth quarter. This was driven by a number of factors, most notably is the various new ad formats Facebook rolled out last year. These include things like app-install ads and other native advertising forms. Additional price leverage may have been obtained by serving fewer ad impressions -- 8% fewer year over year.

Comparatively, Twitter and Google saw the opposite trend -- ad prices decreased and impressions increased. Google increased ad impressions 31%, but the average ad price fell 11%. Similarly, Twitter increased ad engagements 74% while cost per ad engagement fell 18%.

Both companies are increasing volume enough to offset the decline in ad pricing, but Facebook is in a much stronger position. For now, volume growth at both Twitter and Google is coming largely from an increased user base.

Twitter increased its monthly active users 30% year over year to 240.9 million. Google has seen an increase in search queries as a result of increased smartphone penetration. As it says in its 10-K "Our users are increasingly connected to the Internet and using multiple devices to access our products and services, a trend that has increased our global search queries and changed our platform mix."

Both companies will need to improve ad rates as their user base saturates. There's already signs of saturation at Twitter as timeline views declined sequentially last quarter for the first time in history. Additionally, smartphone sales growth is beginning to decline.

Source: Twitter 10-K.

Can Facebook keep this up?
The note from UBS points to advertiser channel checks that support continued pricing strength at Facebook. That's a great signal that this isn't just a one-off occurrence from increased holiday ad spending. The question, however, is why is Facebook succeeding where Google and Twitter are ... not succeeding?

The biggest factor I see is that Facebook is very effective at attracting small businesses and giving them an online presence. Facebook makes it easy for businesses to set up a page to tell people about themselves and engage with customers online.

Unlike Twitter, which provides limited space for descriptions and pictures, Facebook gives businesses much more flexibility. Last quarter, Facebook added another 5 million small business pages, bringing its total to 25 million. This is a huge market for Facebook to tap into, and it's done so rather successfully through low minimum ad spends and intuitive marketing for novice marketers.

The ROI for Facebook ads is better than Twitter as well. A study by Cowen and Co. found Twitter was especially bad for small businesses without sizable marketing budgets and its cost-per-click was four times higher than Facebook. In fact, this is something cited in the UBS note, "outsized ROIs on [Facebook] are more than sufficient to justify this greater spend."

Meanwhile, Google advertising all but requires a business to have an established online presence through a website. The alternative is setting up a page on Google's social network, Google+. Google+ lacks the engagement of Facebook, however, so if a business is choosing to invest in one platform over another, Facebook is likely to win its business.

As long as Facebook remains the place for small businesses to establish an online presence, it should continue seeing its ad prices climb as demand increases and supply stabilizes while continuing to offer the most effective ads in the business.

Still more upside left?
Facebook shares have already made a significant climb in 2014, but UBS's new price target of $90 implies another 25% upside. While it might not always be advisable to put faith in one analysts price target, the reasons behind an upgrade or downgrade are much more valuable.

In this case, Facebook appears to have significant strength in online ad pricing because of the strength of its platform. The leverage in ad pricing should result in strong earnings growth for investors.

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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Twitter. 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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