FB Stock: Can Facebook Gain At Alphabet's Expense?

The battle between Facebook Inc and Alphabet Inc for the dominance in the digital video advertising space heats up.

FB Stock Can Facebook Gain At Alphabets Expense

During the Q4 earnings call, Facebook Inc (NASDAQ:FB) COO Sheryl Sandberg reiterated that the Menlo Park, California, based social media company will face strong headwinds on the growth front as "ad load" has saturated. Facebook can't show more ads in the news feed without harming the user experience. To mitigate the headwinds from saturation in ad loads in the news feed, Facebook Inc is making a big push towards video content. CEO Mark Zuckerberg considers video as a "megatrend on the same order as mobile". The social networking giant has announced billions of dollars of investment in video content. However, the company is likely to face strong competition from Alphabet Inc (NASDAQ:GOOGL). The battle between the search engine giant and the social network company for a bigger slice of the multibillion-dollar online advertising market is heating up.

Digital video Ad spending to grow at a much faster clip.

Currently, TV ad spends dwarfs other forms of advertising in the United States. In 2016, total ad spending on television was $76.06 billion, up from $68.88 billion in 2015. In contrast, digital video ad spends came in at $9.84 billion in 2016, up from $7.66 billion in 2015. While the television advertising spend will continue to dwarf digital video ad spend, digital video ad spend is playing the catching up game. The online advertising market is expected to grow at a much faster clip going into 2020. According to marketing research agency, eMarketer, digital video ad spending will grow at a double-digit rate till 2020, compared to lower single digit growth in TV ad spend.

Digital video ad spend is expected to grow from $9.84 billion in 2016 to $16.99 in 2020. A portion of this strong growth will be driven by advertisers directing more dollars from TV ads to digital video ads. TV ad spend is expected to grow from $70.6 to $77.17 billion in 2020. The strong growth in the digital marketing spend is not only restricted to the US. According to Statista, digital video ad spending worldwide will grow from $17.68 billion in 2016 to $23.78 billion in 2017.

Facebook Inc looking to replace YouTube as the hub of all videos.

To capture a greater share of this growing digital video ad spending, Facebook has taken several measures, including the launch of Facebook TV app on Samsung smart TV. App launches for Apple TV and Amazon TV are also scheduled for release later. Earlier, Facebook had launched a dedicated tab for videos in its mobile app for live videos. The good news for Facebook is that its videos, both live videos and the newsfeed videos enjoy good traction with users. According to a survey by UBS Evidence Lab, 17% of respondents said that they used Facebook for live streaming, against 16% for YouTube. During the Q4 earnings call Facebook CFO Dave Wehner had said that "Video's one of the big drivers of engagement growth on Facebook. It's also helpful on Instagram,".

In line with Facebook's announcement during the earnings call, the company is making a strong push for original content programming. Facebook is reportedly seeking weekly shows with 30 minute episodes to make its video content stickier. The company is seeking original programming content genres from science to sports. However, the company is likely to avoid the hard news for now, as it may anger the news channels which publish videos on the social network. According to Facebook's head of global creative strategy Ricky Van Veen, the main aim in seeking original content is to jumpstart an ecosystem of partner content. To quote him:

"Our goal is to kickstart an ecosystem of partner content for the tab, so we're exploring funding some seed video content, including original and licensed scripted, unscripted, and sports content, that takes advantage of mobile and the social interaction unique to Facebook. Our goal is to show people what is possible on the platform and learn as we continue to work with video partners around the world."

Additionally, the company has also approached MLB to telecast one game a week on Facebook. Facebook is aiming to replace YouTube as the hub of all kinds of videos.

Google launches paid channels on YouTube.

Taking on YouTube may not be an easy thing, though. For starters, YouTube has a much larger collection of content and is able to target customized videos for its users. According to a report from The Wall Street Journal, YouTube crossed the 1 billion mark in total hours of video watched in a day. This a ten-fold increase from 2012 when YouTube launched the customized video suggestions using its algorithm based on the user's search history and interests. In comparison, users watched around 100 million hours of content on Facebook daily. That's a huge gap.

Google also announced the launch of a subscription service on YouTube. For $35 a month you will get access to 40 channels including the four broadcast networks CBS, Fox, ABC and NBC, regional sports networks and cable channels like ESPN and Fox News. The YouTube TV service will also offer unlimited cloud DVR, an AI-powered search and recommendation system as well as access to YouTube Red programming. With the launch of the YouTube TV service, Google is looking to divert TV ad dollars to YouTube. Google has a strong competitive advantage when it comes to digital video content. With is algorithmic targeted content, it is able to retain users for a longer period and serve target ads. It is because of this that 72% of the advertisers are likely to advertise on YouTube compared to 46% on Facebook.

Facebook Inc is likely to gain but YouTube will still remain dominant.

2017 is a "heavy investment" year for Facebook. The company is planning to increase its investment from $4.5 billion in 2016, to $7-$7.5 billion in 2017, a large chunk of which will be invested in video content. While the higher expenditure will be a drag on profitability in the short term, if executed right, videos could become an important growth driver. While the company is likely to face strong competition from Google, which will remain the dominant player in the digital video ad space, Facebook is still likely to gain from the strong growth in digital video ad spending. After all, a rising tide lifts all. FB stock remains a good long term buy. Facebook stock is part of our Top Stock Picks from technology sector which have returned more than 120% over the years.

Kumar Abhishek Kumar Abhishek   on Amigobulls :

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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