(By Mani) Facebook, Inc. (NASDAQ: FB) is a stock that investors keenly expect to outperform in 2013 as the social networking giant is experiencing a re-acceleration of ad spending from large brands that are returning for mobile "reach & frequency" and more video ads.
Meanwhile, direct response (DR) advertisers are now armed with a proper set of ad buying tools, while Facebook Exchange receives most of the attention.
"We believe Facebook's advertising platform is currently gaining momentum with both traditional brand advertisers and direct response (DR, including a lot of e-commerce) marketers," BMO Capital Markets analyst Daniel Salmon wrote in a note to clients.
The acceleration of revenue is expected to last into summer 2013 when the company will begin to anniversary the ramp-up of its mobile ad business and the launch of tools like Custom Audiences and Facebook Exchange.
A third and much more Facebook-specific group of advertisers – apps built on top of Facebook, particularly game makers – have had a bit more choppy relationship with Facebook lately. But even they have new advertising tools built specifically for them – like Mobile App Install ads – which is keeping dollars on the platform.
"Video advertising is ramping, helping re-pique large brands' interest; we believe the importance of this is underestimated by the Street," Salmon said.
Press reports have recently indicated that Facebook is testing auto-play video ads that will appear in and expand out of the News Feed, which would be potentially launching this spring.
"We've written consistently for the past year that brands and their media buying agencies are increasingly merging their online video and TV advertising budgets and Facebook has largely been missing out on this trend. It appears that will no longer be the case," the analyst noted.
What is well understood by the Street is the rise of mobile after it outperformed expectations in the third quarter of 2012, and the key will be sustainability. For the third quarter ended Sept. 30, 2012, the Menlo Park, California-based company reported a net loss of $59 million or 2 cents per share, compared to net income of $150 million or 10 cents per share for the year-ago quarter.
Excluding items, it earned 12 cents per share, topping Street view by a penny. Revenue for the third quarter rose 32 percent to $1.26 billion, which also came in ahead of the consensus view of $1.23 billion. Advertising revenue for the quarter increased 36 percent to $1.09 billion.
"We believe Facebook is currently undergoing another rush of money from brands moving money to its mobile ads. We find this to be similar to what happened in late 2010 through 3Q11 when brands rushed to the platform buying ads to build their fan bases and ‘likes,"' Salmon said.
While programs such as Facebook's partnership with Datalogix to show Facebook advertising's impact on offline sales aim to help solve those questions, in the meantime brands are returning for mobile engagement and classic "reach and frequency" tactics.
With more than 600 million mobile users with high time spent on site, Facebook is a one-stop shop for scaled mobile branding campaigns. Meanwhile, increasing use of video and mobile ads also helps buttress against broader online ad pricing pressure.
"While we remain of the belief that both Facebook and the broader web will see ad prices fall over the long term (or at least as long as we remain on the march to "infinite inventory"), Facebook itself has been an area of relative pricing strength for the past few years," Salmon noted.
In addition, the shifting of its mix of ad formats sold to the "pockets of strength" in mobile and video should help keep ad pricing from going red a little longer. Moreover, Facebook is more fully embracing native monetization like Sponsored Stories and Gifts, and conversations with agency contacts indicate Facebook has improved its outreach to Madison Avenue.
"Our new target multiple is 45x 2013 non-GAAP P/E (or 38x 2014) vs. 25x previously. We believe rising estimates will pull up the multiple and 45x still comfortably falls between GOOG's 15x multiple and LNKD's 100x," Laws added.