GM unfriended Facebook because the automaker didn't think its ads on the site had a sufficient impact on user decisions to purchase cars. That must have spooked some investors who were thinking about buying stock on IPO day, especially since the company had already suffered a 7.5% quarter-on-quarter decline in ad sales in its first quarter.
But not everyone thinks the way the big carmaker does, even within its industry. Ford
Like Ford, Coca-Cola
Time to drive some growth
That's good for Facebook, which lives and dies by advertising -- 85% of its $3.7 billion in revenue last year was derived from ads. Given that the company is currently valued at a forward one-year P/E of 47 and is expected to grow by about 40% over that time, it's going to have to bring in more ad spend to add to the top line.
The two supporters seem willing to oblige. Ford said it's going to spend more than 25% of its 2012 ad budget on digital media, and much of that amount will go toward interactive content -- the type of content that is very much at home on social-media sites.
How much could Ford's outlay add to Facebook's revenue? In 2011, the car company spent around $4.1 billion on advertising, which was approximately 5% higher year on year. If we estimate conservatively by applying that same rate to this year, we get a ballpark figure of $4.3 billion. A quarter of that figure is about $1.1 billion, and capturing a sizable percentage of that amount would mean a lot for a company with $3.15 billion in advertising revenue last year.
For the many disgruntled Facebook shareholders out there, such numbers provide a reason to be cheerful. The company would need only a few Fords or Cokes, and a host of smaller advertisers, to consistently buy spots to hit or even exceed the growth level required to gain investor respect.
What's a "like" worth?
Nearly all the major players in the social-media advertising game agree that since the medium is so new, it's hard to gauge the effectiveness of an ad campaign on such a website. For its part, Coke admitted that determining the value of a click or a "like" or a share will take it some time.
Meanwhile, the beverage maker has a heavy stamp on the site, with more than 42 million "likes" of its page from Facebookies all over the planet. If that number was the population of a country, it would rank as the 32nd largest in the world, well ahead of such worthy competition as Poland, Canada, and Australia.
So whatever the ultimate value of connecting with a social-media user is determined to be, it'll probably be considered a bargain. Forty-two million people are a huge customer base, not to mention a wide and strong foundation for buzz building.
Making its pitch
Another encouraging development in the Facebook ad story is the machinations of the social-media operator itself. According to the company, about six months ago it launched an initiative to consult with a bunch of its big clients as to how it could better take advantage of its ad opportunities.
And not long after the GM defection, Facebook reached out to another business partner, research firm comScore, to compile a report about that effectiveness. Perhaps not surprisingly, that report was rather glowing. Looking past the obvious issues of objectivity, however, the fact that Facebook is making such an effort in the first place is grounds for optimism. And as it comes in the midst of that advisory initiative, it doesn't appear to be purely a case of damage control.
Facebook still has a long way to go before it proves itself to an understandably skeptical market as a viable business with sufficient growth potential. Zuckerberg and Co. are not great communicators, and they'll need to improve if they want to boost those ad sales. The support of Coke and Ford helps; hopefully for shareholders, this means other big spenders will jump on board and buy some ads, too.
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Fool contributor Eric Volkman owns shares of Facebook and drinks Coca-Cola but doesn't drive a Ford. The Motley Fool owns shares of Facebook, Ford, and Coca-Cola. Motley Fool newsletter services have recommended buying shares of Ford, General Motors, and Coca-Cola and creating a synthetic long position in Ford. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.