Facebook's Strong Ad Stream

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (Trefis) -- Facebook's ability to far outshine other display ad players like Yahoo!(YHOO) in user engagement as well as its dominating presence in the social gaming market should continue to propel the company's growth for years to come.

However, we also expect Facebook to extend its platform to e-commerce as well, thereby reducing its reliance on social gaming giants like Zynga(ZNGA).

We have updated our analysis for Facebook based on the company's recent S-1 filing in anticipation of its initial public offering later this year. The updated Trefis valuation for Facebook stands at roughly $74 billion, based on our revised forecasts, including revenues, EBITDA margins, capital expenditures and net working capital. You can modify the drivers behind our analysis to explore upside and downside scenarios for the company.

See our complete analysis for Facebook here.

Text and Display Ads

Advertising remains Facebook's biggest division, contributing almost 80% to its overall value. This is primarily because of two factors: scale and user engagement. Facebook already has 845 million monthly active users that is expected to cross 1 billion this year. In addition, user engagement within this user base is also high, clocking around 1,200 monthly page views per user.

The high engagement is a result of innovative product development at Facebook, such as Timeline, which is designed with the long-term vision of ensuring that user stickiness to Facebook remains high.

In the future, user stickiness would also be driven by Facebook's Open Graph, which is expected to diversify beyond just social gaming apps into other media services, such as music and videos. However, privacy issues would remain a credible threat to user engagement, given how Facebook was criticized for its "frictionless sharing" concept last year.

Facebook also makes money by acting as a platform for the purchase of virtual goods on social gaming applications. The key gaming developer for Facebook is Zynga, which accounted close to 12% of Facebook's revenues in 2011.

Zynga's games like "Farmville," "Words With Friends" and "Poker" have been wildly popular, enabling Facebook to extract a sizable revenue share from the sale of virtual goods like poker chips. As social gaming continues to disrupt the traditional gaming industry, Facebook's massive scale should continue to keep it as the preferred platform for game developers. This is expected to increase the average virtual goods spend per Facebook visitor. Consequently, the contribution of virtual goods to Facebook's stock is estimated at around 17%.