This week, shares of the biggest social media company surged 30%, which is the best performance for Facebook since the company went public in 2012. The surge in value also added about $3.5 billion to Mark Zuckerberg’s bank account. But why?
Facebook looks like it has figured out how to turn a profit on mobile devices. That is something that has plagued many tech companies such mobile became the future a few years back.
Facebook’s new grasp of the mobile market has reassured investors on Wall Street, who had previously soured on the future of the company. In the words of one broker, “The negative view of Facebook on Wall Street is evaporating. You can’t ignore 1 billion users.’
Profits reported this week for the company blew forecasts out of the water, and were largely driven by the performance of Facebook on mobile apps. After about a year of redoubling its efforts to make money on mobile apps, Facebook saw its mobile users increase 51% during the second quarter of 2013. And, 41% of advertising revenue is now coming from mobile devices.
Here is how Facebook, which has simplified its ad options recently, has done it:
- Ad placement: Most of the revenue on mobile is coming from the ads between the entries on newsfeeds. These ads get people’s attention without being too annoying.
- Keeping prices up: One of the big worries for investors was that mobile ads often are priced under those of desktop ads. But Facebook is charging the same fee for both. Facebook can get away with it by giving advertisers excellent tools to track how effective an ad is.
- Facebook has resurrected pre-IPO dreams: Investors who thought Facebook had unlimited potential bought like crazy at its IPO of $38 a share. But investors abandoned it when they thought that the company could never adjust to mobile. But now, it is showing great prowess with mobile platforms, and shares jumped 30% this week. Investors believe again.
Challenges remain: At $34, the stock has a fair value, so Facebook will need to do more to get it past $38. One of the big goals is to boost the mobile ad business by a factor of 10, which is something that is still far away at this point.