Facebook Blows Away Doubters With Mobile Success

3:35 PM, Jul 25, 2013   |    comments
(Photo: Karen Bleier, AFP/Getty Images)
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Matt Krantz, USA TODAY

LOS ANGELES - Facebook is turning into one of the first companies to figure out how to turn those tiny little ads on mobile phone screens into big business.

Perhaps ushering in a new era of turning the proliferation of mobile consumption of news and information on devices into a massive business, Facebook is turning the heads of Wall Street who thought it was a losing battle.

"The very negative view on Facebook is evaporating," says Colin Sebastian at Robert W. Baird. "You can't ignore a billion users."

Profit reported this week by Facebook not only blew away forecasts, but it was largely driven by a moneymaking machine inside the company linked to mobile apps. Only about a year after redoubling efforts to make money off mobile users, Facebook saw its number of mobile users explode 51% during the quarter. But more important for a company that was created for desktop computers, now 41% of advertising dollars comes from mobile users.

"They're lucky," says Rick Summer of Morningstar. "They have fantastic assets that translate well to a mobile experience."

Facebook's moves with turning mobile access into money blew away Wall Street, which has soured on the company's future. "We were wrong," was the title of a report by Richard Greenfield at BTIG, who had rated the stock a sell with a $22-a-share price target.

Progress by Facebook turning tiny ads on screens into a key part of its business highlights:

• The importance of where mobile ads appear. Nearly all of Facebook's mobile revenue is generated by ads that are inserted between entries on users' newsfeeds, Summer says. These ads are proving to be effective in getting users' attention without annoying them, so far, he says. Another type of ad that's catching on are ads in mobile Facebook apps that prompt users to download another app, he says. "They have a format that works," he says.

• Preservation of ad pricing on mobile. One of investors' top concerns with mobile ads is they tend to be priced below desktop ads because they're so tiny. But Facebook is bucking the mobile ad discount because its users are so tolerant with invasive ads, Summer says. Much of Facebook's success with mobile, too, is a function of it getting more sophisticated dealing with advertisers, Sebastian says. Facebook is giving advertisers better tools, for instance, to track the effectiveness of all ads, which lures in more ad dollars, he says.

• Approach to its promise at the time of its IPO. Investors thinking Facebook had no limit lined up to buy at $38 a share a year ago. But the story faded, along with the stock, as investors assumed the company would have trouble adjusting to mobile. But now that it's making progress, shares are soaring, jumping $8.20, or 30.9%, Thursday to $34.71.

At $34 a share, the stock is fairly valued, Summer says, so the company needs more tricks to get back to $38 a share, he says. A key part will be to boost the mobile ad business 10 fold or more, something that Facebook's current setup doesn't allow and will require more breakthroughs, he says. "There are still lots of things to figure out," he says.

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