Facebook (NASDAQ:FB) has taken its time, listened to feedback, and is now fully prepared to launch video advertisements to compete with peers Twitter (NYSE:TWTR) and Google (NASDAQ:GOOGL). With the stock hovering around $70, and being a top industry performer, will it benefit the most from this service?
A market that can't be ignored
Facebook's move to video advertising has been anticipated for the last six months, and after a successful video sharing service for users, the company will now use the same format on news feeds to deliver expensive and (likely) lucrative advertisements.
In terms of fundamental impact, this is a service that Facebook could not ignore and had to monetize quickly. The company is in a three-way race with Google and Twitter -- Google's YouTube is winning by a wide margin -- to capitalize on a market growing at more than 30% annually. This growing market remains just a small percentage of the $200 billion TV advertising market.
Online video traffic has soared in the last year, as increased bandwidth, better camera equipment, and a decline in the cost of storage have all played a role in improving the user experience. For this reason, YouTube's usage and advertising revenue has soared.
Specifically, YouTube channeled more than $5.5 billion last year, equating to growth in excess of 50% year-over-year. More importantly, in just two years, YouTube's advertising revenue has doubled as a percentage of Google's total revenue, making it a future staple in the company's future.
Two more players step-up
Given YouTube's growth relative to Google's other advertising revenue, it's no surprise that Facebook and, to a lesser degree, Twitter are also stepping up to the plate.
Currently, it's hard to estimate how lucrative Facebook's new service could be for the company, but long-term the math looks quite bullish for investors. Reportedly, Facebook's video ads will be 15 seconds in length. The Wall Street Journal reports a daily rate to advertisers of $2 million; AdAge quoted a Facebook executive who notes the company wants to run four different ads daily.
Therefore, starting off, Facebook will run four 15-second video ads multiple times per day for a price of $2 million per ad. That's $8 million per day. Multiplied by 365 days per year, Facebook could earn nearly $3 billion with this format, which would be 25% of its expected revenue for 2014.
In regard to Twitter, the company has very quietly begun to roll out video-related tweets. In January, Evercore called Twitter a "strong company" in relation to its place in the video advertising space. The firm cited "the combination of its immediacy and the support that it is receiving from the traditional TV industry" as playing a role in allowing Twitter to eventually thrive.
Evercore projects $6 billion in revenue for Twitter in 2016, and believes 17% could come from video ads.
Where's the investment value?
Facebook, Google, and Twitter are at different stages in the development process, but all are also well-positioned to grow. Yet, the big question is which stock presents the greatest upside in connection to this space.
If Twitter reaches $6 billion in revenue, video ads will obviously play a large role. If it continues to trade at $52 with no future dilution, that would represent a price-to-sales ratio of 4.7, which means despite growth, its upside might still be limited.
Google continues to look good, as YouTube has over 1 billion users each month, including 6 billion hours of viewing per month. Furthermore, Google continues to make investments that have synergy with its core business, such as Fiber, which increases Internet speeds by 10-fold, conveniently leading to increased capacity and a better experience when viewing content online.
Finally, with Facebook's 757 million daily active users, it has about seven times the audience of the Super Bowl, which earned $4 billion for a 30-second TV spot last year, implying the demand could be quite high. If the company eventually doubles its daily rate and increases the number of daily ads from four to 10, or so, Facebook could top out with nearly $15 billion in video advertising revenue, meaning a good growth driver for the future.
As implied, Twitter is just too expensive, and even though Facebook has great growth prospects with video advertising, it is still hard to imagine a scenario where it fundamentally supports its current $175 billion market capitalization.
Google, on the other hand, continues to see great engagement, strong growth, and at 6.6 times sales it is far cheaper than either of its advertising peers. Additionally, Google has the opportunity to expand advertising into other services such as Google.com or possibly even Android, which leaves a large door of opportunity open, making it the best investment option.
More compelling ideas from The Motley Fool
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.
Brian Nichols 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.