Facebook's hidden jewel proving to be boon

The social media company has seen strong revenue bumps lately, but it's also managed to cut costs in a unique way.

By TheStreet.com Staff Jul 23, 2014 2:39PM

A magnifying glass is posed over a monitor displaying a Facebook © Joerg Koch/APBy Chris Ciaccia, TheStreet


Though Facebook's (FB) advertising business is growing like weeds in an untended garden, the social media company's lower profile Open Compute Project is proving to be a genuine windfall for shareholders, having saved more than $1.2 billion over the past three years, according to sources close to the situation.


Facebook's Open Compute Project, which the company first implemented in April 2011, has focused not only on the tremendous amount of data it consumes and analyzes, but has helped increased overall energy efficiency while cutting costs. Facebook operates data centers in Prineville, OR., Forest City, N.C., Lulea, Sweden and is currently in the process of building one in Altoona, Iowa. 


TheStreet.com logoSince it was founded three years ago, OCP has grown to include more than 150 official members and dozens of technology contributions from companies led by Microsoft (MSFT), Intel (INTC) and ARM Holdings (ARMH).


Since April 2011, Facebook has saved enough energy to power 40,000 homes for an entire year. Carbon savings in that same period is the equivalent of taking 50,000 cars off the road for an entire year.


SunTrust analyst Robert Peck, who rates Facebook "buy" with a $72 price target, says the company's quarterly results will continue to be strong, and that new products are likely to give the stock a boost in the near future. Peck cited changes to the right hand rail ad formats, video-ad unit testing, the start of Instagram monetization and the announcement of its mobile Facebook Audience Network as among its next big products. 

"We think these areas, plus further announcements will be instrumental in driving the next leg of growth for the company," Peck said in an analyst note.


Analysts surveyed by Thomson Reuters expect the company to earn 32 cents a share on $2.81 billion in revenue.


Though Google (GOOG) is the leader in the digital ad market, accounting for some 32 percent of digital ad spending worldwide last year according to eMarketer, Facebook is gaining ground. Facebook accounted for 5.8 percent in 2013, as it generated $6.74 billion in advertising revenue in 2013 ($7.87 billion in total revenue). The worldwide ad market was $120.05 billion, and eMarketer expects it to grow another 16.7 percent this year to reach $140.15 billion.


Goldman Sachs analyst Heather Bellini, who rates Facebook a "buy" with a $78 price target, says there's a good chance for "upside risk" to consensus estimates, as Facebook continues to increase its share of the overall corporate advertising pie. 

"Overall, our contacts say the Facebook ad budgets continue to grow meaningfully, with the number of advertisers increasing," Bellini wrote in a research note. "Furthermore, many have expectations for meaningful increases in ad budgets as they look into CY15."


Sterne Agee analsyt Arvind Bhatia adds that the digital advertising industry is growing faster than previously expected, benefiting Facebook. "We believe the digital advertising industry is growing faster than previously expected and FB continues to gain share," Bhatia wrote in a research note. Bhatia rates Facebook "buy" with an $80 price target.


Looking ahead, Bhatia says the recently-concluded World Cup likely helped boost user engagement, and the eventual closing of the WhatsApp deal will help sentiment, as it puts "the spotlight back on the positives of the acquisition (scale, user growth, international reach, etc.)."


Perhaps even more important than the total advertising market is the mobile advertising market. Much of the world is increasingly turning to smartphones and tablets for its computing needs. At the end of the first-quarter, Facebook had 1.01 billion monthly active users on mobile, up 34 percent year-over-year and 609 million daily active users.


EMarketer noted that the mobile ad market was $17.71 billion last year, and is projected to grow 85 percent this year to $32.71 billion. Big numbers indeed, and Facebook and Google will own more than 70 percent of that global mobile ad spending, according to eMarketer.


During the quarter, Facebook held its f8 developer conference, where CEO Mark Zuckerberg announced several major initiatives, including the mobile Like button, App Links, and the introduction of the Facebook Audience Network, Facebook's mobile ad exchange, which Bhatia believes will be enormous for Facebook, as the company focused on mobile first. 

"We believe by 4Q15, mobile advertising revenue could represent ~73 percent of total advertising revenue for Facebook," Bhatia wrote in a note. "Facebook's recently launched mobile ad network called Facebook Audience Network will likely prove critical to this. In fact, Facebook has made it clear it wants to be the very fabric of the mobile ecosystem." 

At f8, Facebook's Deb Liu noted that now nearly 60 percent [acutally, 59 percent] of Facebook's revenue comes from mobile, due to actually tailoring the experience to users. Ads on mobile are not disruptive, and Facebook Audience Network can only help, as the company works with advertisers to bring relevant, interesting ads to users. Liu noted it encourages advertisers to work with Facebook, given the size of its audience.

Facebook is slowly making in-roads with other advertising initiatives as it continues to test auto-play video ads and the monetization of Instagram begin to get on track later this year, and into 2015. With the WhatsApp acquisition expected to close in the next couple of weeks as well as the pending acquisition of Oculus Rift, Facebook has several growth engines going for it in the next few years. 


Deutsche Bank analyst Ross Sandler, who rates Facebook "buy" with an $85 price target, says Facebook is continuing to operate quite well, and given sentiment towards Internet stocks (despite recent comments made by Federal Reserve Chairman Janet Yellen), bodes well for investors.


"Unlike last quarter's solid-upside-but-disappointing-follow-through, which was largely a function of market sentiment towards Internet stocks, strong results in 2Q should translate into a higher price," Sandler said.


More from TheStreet

 

27Comments
Jul 23, 2014 5:26PM
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Cancelled my FB account several weeks ago. FB founder and CEO Mark Zuckerberg is openly calling for amnesty of over 12 million illegal aliens that have invaded the U.S.

 

Nope, not giving him the opportunity to enrich himself with my personal information. I work for a living, he's a billionaire - he wants them let him pay for them.

Jul 23, 2014 3:25PM
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Does anyone else have a problem with the acronym used for "Open Compute Project"? If you recall, OCP was the name of the evil company bent on domination in the movie RoboCop. Coincidence? I think not...
Jul 23, 2014 5:17PM
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ROLMFAO ..... Facebook, Twitter, Google? Why not just make an NSA account instead & send ALL your personal info & habits to it. All of them are just spying tools used to collect info about us.
Jul 23, 2014 10:49PM
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The subject of the article is the Open Compute Project. The article never actually explains what it is, only some of the partners and the cost-savings claims. Remember the news mantra: who, what, when, where, why. Got it?
Jul 24, 2014 11:40AM
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"Open Commute Project"... I think it's really called 'Data Mining" and snooping.
Jul 24, 2014 9:57AM
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Yet another false economy.  If FB was not storing all those updates and pics they would not be sucking up all that power in the first place.  Think of the homes they could power and the carbon they could save by disappearing!
Jul 24, 2014 7:59AM
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When we disconnect from these social media pariah, we will be a thriving nation again. Not before.
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No self respecting adult would use sit-on-my-facebook.  It so damn boring.
Jul 24, 2014 8:06AM
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I guess it is a place for some or the no life ones to spent their time trying to impress others?
Jul 24, 2014 11:59AM
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When will the law come down on Facebook and the smut pics, videos and pages they allow?  FACEBOOK HAS BECOME the internet Playboy/Hustler.  They take down a breast feeding mother's photo but allow young girls to post nearly nude selfies, and nearly nude dance videos that are clearly sexually explicit, and pages for strip joints.  Sickening.
Jul 24, 2014 12:05PM
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HUH did not know polished turds were hidden jewels.
Jul 24, 2014 1:07PM
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Facebook is sooooooo boring. I don't get on it hardly and when I do, I have seen someone who cooked a meal last night and took a pic of it. Show fifty pics of their vacation with them sitting on a rock or in a swim suit and sceneries some which are okay. Or recipes I don't want nor need. And a bunch of their pets...I don't take pics of my two cats and post them all over Facebook.. who cares....oh come on now...give me break!
Jul 24, 2014 4:57PM
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FB an other Obama bitch. You know it, I know it, we all know it, that's it, there it is.
Jul 24, 2014 6:40AM
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"Facebook's (FB)advertising business is growing like weeds in an untended garden,"

Well clearly that won't last forever and sooner then later, FB will start facing far more difficult quarter over quarter and year over year comparisons. There are only so many advertising Dollars and Consumers as a whole are basically Tapped out.

I told folks from the Start that when a Company hyped like FB goes public, that initial Buzz and plus the advantages of a Bloated Stock price plus cash from the IPO can go a long way at the Start. However, FB has spent over $22Billion to acquire this year alone and if things go South Quickly in the Economy, Stocks like FB will feel it the worse. So far, great run.
Jul 23, 2014 9:11PM
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what day is it...what day is it...come on say it...
Jul 24, 2014 11:24AM
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NOT 50k of my car "off the road for a year"! Less than 3k per year (most years less than 2k).
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