Will Video Ads on Facebook Drive Future Upside?

Despite a market cap of more than $155 billion, Facebook  (NASDAQ: FB  )  still has a number of highly valuable assets in its portfolio that don't generate meaningful revenue. If the company can continue monetizing these assets, Facebook's revenue can continue to grow for a long time.

Facebook's long-awaited move into video advertising is finally gearing up, and this can drive very meaningful upside for the social media company in the near future. 

Rollout of video ads
Facebook has been quietly testing videos with certain major brand advertisers since December 2013, and is now considering a wide rollout. The company struck a deal with France's biggest ad company, Publicis Groupe, to customize video ads for its users. 

Facebook has an edge in terms of ad formats in its platform due to highly engaged users on newsfeeds, and it has strong measurement capabilities. Facebook's gigantic scale and mass will bring in a lot more video advertisers in the future. Facebook has more than 25 million small and medium-sized businesses on its platform. 

Facebook's video ads will be 15 seconds apiece and will be on top of users' newsfeeds. This will provide leading marketers significant reach in the U.S. because of Facebook's data-driven targeting capabilities. 

Online video ads will grow
This shift will provide the company a chance to take a piece of the $70 billion U.S. TV advertising market. As video ads get better prices than comparable ads on TV, the opportunity is very attractive. According to Media Dynamics, the price of an online video ad sold for double the price of a national TV commercial in the U.S. 

The online video ad market is expected to grow 41% in 2014 after a 45% year-over-year increase in 2013. As American consumers are spending more time viewing videos from not only desktop but also on mobile devices, marketers will follow. Estimates from eMarketer suggest that the online video market will grow to $9.25 billion in 2016. 

Video advertising on mobile devices should make up a significant portion of total video advertising due to secular consumer trends. The largest video platform in the world, Google's  (NASDAQ: GOOG  )  YouTube, reported that almost 40% of its worldwide usage is flowing in from mobile devices. In the future, marketers will start putting more video ads on its platform. Facebook and YouTube will emerge as big winners from the growth in online video from desktop and mobile.  

Facebook is a leading video property
There were 186.1 million U.S. viewers of online videos in April, and Facebook consistently ranks behind YouTube as second most-valuable content property online, according to comScore. Facebook can generate a substantial amount of revenue from online video ads due to its 1.28 billion global customer base. Facebook has to be very careful not to be overly intrusive and negatively hamper the user experience, however.

Facebook users are inclined to upload substantial amounts of online videos because the videos are generally shared in a close-knit environment with friends and family. The amount of user-generated content should steadily increase over time, which should also help to engage readers.

The bottom line
Facebook's price correction has created a very attractive opportunity on a long-term basis. Considering that Facebook saw its revenue growth accelerate in the last quarter -- and it still doesn't make material amounts of revenue from highly valuable properties like Instagram, nor has it monetized video ads yet -- there is a very attractive risk-reward ratio in the company's stock price.

Once these assets start generating material amounts of revenue, the company will be able to sustain its high growth rates for in the near-to-medium term and drive strong upside.

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