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TheStreet Open House

Can Facebook Navigate A Tougher Road Ahead?

Stocks in this article: FB GOOG

NEW YORK (TheStreet) - Facebook (FB - Get Report) said the road ahead will get tougher as growth rates at the billion-member social network slow. Analysts covering Facebook, however, shrugged off those concerns. UBS, on Thursday morning, reiterated a valuation of Facebook that would nearly make it one of the ten largest companies in America by market capitalization.

There are two basic facts from Facebook's first quarter earnings and, of course, a lot for investors, analysts and the media to speculate upon.

Facebook unequivocally said a launch of News Feed ads in 2013 will cause future quarters' year-over-year growth rates to slow as comparable hurdles become more difficult. "[We] continue to expect that over the rest of 2014 our year-over-year ad revenue growth rates will decline from the Q1 rate and be meaningfully lower by the end of the year," Facebook said.

For a company that trades at a price of almost 50 times estimates of its 2014 earnings per share, and over 30 times estimated free cash flow, such tempered guidance could cause a high-flying stock to tumble.

Not so for Facebook.


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Another fact is Facebook posted far better-than-expected first quarter results, highlighted by a 82% year-over-year rise in advertising revenue, and an over 100% increase in quarterly free cash flow to nearly $1 billion. Mobile engagement trends at the social network are impressive by almost any measure.

Perhaps Sheryl Sandberg, Facebook's chief operating officer, best communicated why optimism runs high inside Facebook and on the outside.

Citing specific Facebook campaigns run by Canadian retailer Sport Chek and ice cream company Ben & Jerry's, Sandberg outlined how companies can use the social network for an industry-leading return on advertising dollar spent. Sandberg's discussion indicated Facebook may emerge as an advertising tool so crucial to businesses' bottom lines it may eventually garner comparison to Google (GOOG).

"We have a great opportunity to build the world's first platform for personalized marketing at scale. It's early in that journey and we're going to stay focused on making the right investments in our ad business and executing against our plan," Sandberg said.

The Plan Is Working

In prepared comments, Sandberg outlined how Facebook executed on its marketing plan. The comments give insight as to why analytic models of Facebook's financial performance may soon change to distinguish between all of the company's various tools such as News Feed, Paper, Instagram and future efforts such as WhatsApp and premium video.

In the past 12-months, Sandberg said Facebook focused on its proprietary targeting tools to help advertisers improve the effectiveness of their ad campaigns, directly reaching target audiences. Ten times more marketers are now using Facebook's Custom Audiences feature than the first quarter of 2013, Sandberg said.

That would be a positive across Facebook's burgeoning ecosystem. The more Facebook marketers use targeting tools like Custom Audiences, the more relevant those ads become to Facebook's users.

Sandberg also said Facebook is simplifying its ad tools so that smaller companies can find a benefit in Custom Audiences and Partner Categories .Those tools are now available in a self-service ad creation process. For direct response marketers, Facebook now includes 'buy now' or 'install now' buttons that improve the efficacy of their ads.

Facebook's investment measurement tools are also improving, Sandberg said. Online conversion measurement tools now enable direct response advertisers to measure the impact that Facebook campaigns have on sales. "[We] recently launched new offline conversion tools to measure in-store sales, which have yielded positive initial results," Sandberg said.

The development of new products like premium video, ads on Instagram and a recently launched ad network test could expand Facebook's marketing platform. Those projects, however, won't be seen in 2014 earnings, Sandberg said.

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