How Facebook Can Generate More Ad Revenue at Higher Prices

NEW YORK (TheStreet) –– As more advertising dollars move online, Facebook (FB) and its massive 1.32 billion user base continue to take share away from traditional methods. And as the social media giant gets even bigger, it could generate more advertising revenue at higher prices.

JPMorgan analyst Doug Anmuth, who rates Facebook "overweight" with a $90 price target, said he believes that Facebook has a chance to generate even higher pricing than it already has generated, as it continues to remain around 20% of overall U.S. Internet time, excluding Instagram, and WhatsApp, which Facebook announced it was buying in February for $19 billion in cash and stock.

"We believe advertiser demand for Facebook continues to build and greater ad relevancy will yield higher pricing over time," Anmuth penned in a note.

Menlo Park, Calif.-based Facebook continues to be the largest social networking platform in the U.S. and its lead is growing. In August, Facebook had 204.6 million unique visitors across all devices, according to research firm comScore. That's significantly ahead of the other social networks, including Twitter (TWTR) (121.1 million), LinkedIn (LNKD) (86.1 million) and Facebook-owned Instagram, which rounded out the list at 80.7 million impressions.

Facebook has become a mobile-first company, having generated 62% of second-quarter advertising revenue from mobile ($1.66 billion). The mobile ad market continues to grow as users increasingly access the Internet via smartphones and tablets. Research firm eMarketer noted that the U.S. mobile advertising was $9.69 billion in 2013, but it's expected to soar even higher in 2014, rising 83% year over year to $17.73 billion.

Analysts surveyed by Thomson Reuters expect Facebook to earn 40 cents a share on $3.1 billion in revenue in the third quarter.

Cantor Fitzgerald analyst Youssef Squali noted that not only is Facebook the dominant social metric in terms of users, engagement and monetization, it's extending its lead in engagement and ad dollars.

"As ad dollars continue to migrate from traditional media channels to leading online players, we believe FB will be the greatest beneficiary, with Twitter a close second," Squali wrote in a note.

Facebook also continues to see a pickup in advertising spend from larger advertisers, including autos, consumer packaged goods, and offline retailers, a fact that Facebook Chief Operating Officer Sheryl Sandberg has mentioned several times on Facebook's earnings calls.

On the second-quarter call, Sandberg mentioned how companies like Procter & Gamble (PG) and Gillette were working with Facebook to get better reach for their online ads.

"For example, P&G and Gillette worked with us and agencies IVS and Mediacom to launch its Vector III razor to men in India," Sandberg said. "Eighty percent of the 100 million Facebook users in India are on mobile and a majority of these are using feature phones. This was our first feature phone only Facebook campaign. It reached 60% of Gillette's target audience and generated significant lift in both message and ad recall."

Not only is Facebook taking additional share in traditional advertising, it's experiencing strength in video, which the company launched earlier this year.

The company recently announced that it experienced over 50% growth in video views from May to July, and is now doing more than 1 billion views a day, with 65% coming from mobile. Anmuth noted that viral events such as the Ice Bucket Challenge helped this growth, "which we think is important for Facebook to increase the number of auto-play video ads over time."

The mobile video ad market continues to gain more traction domestically, generating higher ad spend. In 2013, eMarketer noted mobile video ad spend was $722 million, but it's expected to jump to $1.54 billion in 2014. Mobile is expected to continue to gain share of video ad spend, with an expected 25.8% of all video ad spend in 2014, up from 18.9% in 2013.

-- Written by Chris Ciaccia in New York

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