Analyzing Business Potential Of Facebook Video Ads

  • Facebook has launched its video ads in 7 countries outside the US.
  • The launch opens the doors to a potential multi-billion dollar opportunity for Facebook.
  • We continue to view Facebook as a high risk bet given the high growth currently priced into the stock.

Analysing Facebook video ad potential

The recent days have seen a great amount of activity and buzz in the video streaming market as Google (GOOG), Yahoo (YHOO) and now Facebook (FB) look to carve out a significant chunk of the video ads market. Following our recent coverage of Google’s interest in and reports of Yahoo acquiring video streaming service RayV, Facebook has today got its international video ads act going with an initial launch across the seven countries of Australia, Brazil, Canada, France, Germany, Japan, and the UK.

This focus on the video advertising market by all the internet giants is expected given that the video ad space is expected to grow at an annual growth rate of 26% over the next few years, according to a report by PWC.

Yahoo has reportedly completed the acquisition of RayV, an acquisition aimed at helping Yahoo Screen take on Google’s YouTube, the current leader in the video ads space with 2013 revenues estimated at $5.6 billion.

Facebook has today announced the expansion of its video ads to seven international markets, having launched it in the US in March 2014. The ads are auto-play ads without audio, with a full screen mode and audio activated upon click by a user. The ads will be rolled out in the news feed of the users and are therefore feasible to be targeted at the mobile users as well.

The natural question to be raised by advertisers was the value of ads which can be easily scrolled past. This is a problem which has been addressed by Facebook by developing and releasing tool to monitor the effectiveness of the video ads served.

Having seen what YouTube has achieved with video ads, we take a look at what could be on the cards for Facebook in terms of additional revenue.

To understand the impact of Facebook video ads let’s look at the numbers below. Facebook currently has close to 1.28 billion monthly active users (MAU) and ended Q1 2014 with over 800 million daily active users (DAU). What could be the potential  of video ads for such a huge audience?

YouTube Facebook
MAU (in millions) 1000 1280
Annual revenue ($ in millions) 5600** 1792*
Revenue per user ($) 5.6 1.4*

*based on revenue per user number at 25% of YouTube

**Estimate from Seeking Alpha article on YouTube

Using the monthly active users and the revenue per user of YouTube, in 2013, we arrive at the potential value of video ads for Facebook. Given that YouTube is a pure video platform, video advertisers are likely to continue preferring it over Facebook. Hence, we assume that Facebook will be able to generate revenue per user which is 25% of YouTube’s ($5.6). Using the derived revenue per user and the Last given MAU number we arrive at a video ads potential value for Facebook close to $1.8 billion. The estimate is close to 22.5% of the last reported revenues of Facebook (2013).

It is evident that the video ads and its successful monetization present Facebook with a hugely attractive opportunity to grow its topline, which is what Facebook stock is currently valued for. However, considering the huge valuations currently priced into Facebook’s stock price, we see considerable risks entering into the stock at the current valuation levels. Our risky outlook is reflected in our Facebook stock analysis.

To see Facebook’s latest stock price movement, click here Facebook(FB)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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