5 Things Facebook Inc.'s Management Wants You to Know

From tapping into marketers' TV budgets to bringing the Internet to the rest of the world, here are the key things you need to know about Facebook's strategies.

Aug 19, 2014 at 9:30AM

Shares of Facebook (NASDAQ:FB) soared to all-time highs after it reported second-quarter earnings last month. Since then, the stock has managed to hold its ground as the market continues to digest the implications of the social network's great quarter. While the company's increased revenue and earnings have had their fair share of the spotlight in the weeks following the earnings report, there are still some key items from the company's conference call that are worth a closer look.

Here are the five most important quotes from the call that you don't want to miss.

There is room for higher engagement

Facebook CEO Mark Zuckerberg:

One thing that's exciting is that there is still a lot of room to grow. On average, people in the U.S. -- people on Facebook in the U.S. -- spend around 40 minutes each day using our service, including about 1 in 5 minutes on mobile. This is more than any other app by far, but overall, people in the U.S. spend about 9 hours per day engaging with digital media on TVs, phones and computers. So there's a big opportunity to improve the way people connect and share across how we all engage with the rest of media as well.

Investors in this hot growth stock want to know that the social network's growth story is not over. While Facebook's year-over-year revenue growth rate of 67% during the quarter did beat expectations, it was notably the first time the key metric slowed sequentially in the past five quarters. Therefore, Zuckerberg's reassurance that "there is still a lot of room to grow" is good news.

Zuckerberg Facebook

Facebook CEO Mark Zuckerberg (right) in his conference room. Source: Facebook.

Of course, with Facebook already taking up 40 minutes of users' time each day, improving engagement further will not be easy. Nevertheless, the added perspective of the significant amount of time people spend engaging with digital media does make a convincing case that there is still opportunity for engagement growth in the company's most important market.

The focus is both near and long term

Zuckerberg:

We're going to continue investing aggressively in areas that are important for our mission and long-term strategy, but we will also stay focused on our core products and business. This is the best way for us to continue creating value for our community.

Given Facebook's robust valuation with a wildly optimistic future already priced in, investors want to see the company executing on both near- and long-term strategies. Fortunately, Facebook appears to be doing exactly this.

Long-term strategies include the company's efforts to bring affordable Internet access to every person in the world through Internet.org, and the social network's acquisitions of Oculus and WhatsApp (still pending a closing) -- two big bets that the company is making on its efforts to connect the world. While the strategies may be speculative in nature, it's good to see the company at least making bets.

Near-term plans to build Facebook's business vary widely. Paramount among the plans, however, are Facebook's efforts to give its users more tools to share. Key examples include its Messenger and Instagram apps. And other new apps and tools will spring up from Facebook's Creative Labs, purposed to find new ways to build value for Facebook users by providing new contexts for the network beyond the blue app with which the world has become so familiar.

Facebook Tmf

More concrete ways Facebook wants to build immediate-term value is through a continued shift to mobile (where ads are more engaging) by growing the number of marketers on Facebook, and by improving the company's ad products.

Instagram can be monetized, after all

Facebook COO Sheryl Sandberg:

[We]'re seeing positive early demand from marketers for ads on Instagram ...

When Facebook initially announced it was going go acquire Instagram for about $1 billion, there were many doubts that the social network overpaid. But it's becoming increasingly clear that $1 billion was a bargain. Not only has the service grown from just 30 million active users to over 200 million, but Facebook is now also proving it can successfully monetize this large user base.

Sure, Facebook hasn't made public any specific revenue figures for Instagram, but it's likely that "positive early demand from marketers for ads" on a platform with more than 200 million monthly active users this early in the game easily justifies the $1 billion price tag.

Facebook video ads may steal from TV budgets

Sandberg:

We also introduced premium auto-play video ads this year. Video on Facebook helps brands extend their TV investments by combining traditional reach-focused campaigns with our unparalleled targeting abilities. To date, we've run about a dozen campaigns and the early data show promising results.

While video ads on Facebook are still in their very early stages, the idea of big marketers extending their TV investments to Facebook is exciting -- and yet another area for potential growth.

Facebook Video Ads

Facebook is rolling out video ads to big marketers. Source: Facebook.

Ads are declining while pricing power is soaring

Facebook CFO Dave Wehner:

In Q2, the average effective price per ad increased 123% compared to last year while total ad impressions declined 25%. The decrease in ad impressions continues to be driven by the shift toward mobile usage, where people are shown fewer ads compared to desktop.

Investors want to know that Facebook doesn't have to add any more ads in order to grow revenue. Bombarding users with a higher number of ads to grow revenue could take away from the user experience. A trend of decreasing ad impressions and soaring pricing power, therefore, is the holy grail for social platforms. Fortunately, a shift to mobile, where ads are more effective, is enabling the company to achieve this. The improving value proposition for advertising on Facebook is boosting pricing power at rates well beyond the rate of decline in ad impressions. Even better, Facebook doesn't have to do much in order for this trend to continue; the shift to mobile, by itself, is the major driving factor.

If this trend can continue for several more years, this pricing power leverage in an increasingly mobile environment could prove to be a substantial long-term lever for revenue.

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Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple and Facebook. The Motley Fool owns shares of Apple and Facebook. 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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